NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
2018
NOTE 1
– BASIS OF PRESENTATION
The 2018, 2017 and 2016 Consolidated 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 ("GAAP"). We have eliminated all intercompany transactions and accounts. We present the notes to our Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
On June 8, 2015, BWXT's board of directors approved the spin-off of B&W through the distribution of shares of B&W common stock to holders of BWXT common stock (the "spin-off"). On June 30, 2015, B&W became a separate publicly-traded company, and BWXT did not retain any ownership interest in B&W.
Going Concern Considerations
The accompanying 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 Consolidated Financial Statements do not include any adjustments that might result from the outcome of the going concern uncertainty.
We face liquidity challenges from losses recognized on our six European Vølund loss contracts described in
Note 7
, which caused us to be out of compliance with certain financial covenants and resulted in events of default in the agreements governing certain of our debt at each of December 31, 2017, March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018. Our liquidity is provided under a credit agreement dated May 11, 2015, as amended, with a syndicate of lenders ("Amended Credit Agreement") that governs a revolving credit facility ("U.S. Revolving Credit Facility") and our last out term loan facility ("Last Out Term Loans"). The Amended Credit Agreement is described in more detail in
Note 19
and
Note 20
.
We obtained waivers to the Amended Credit Agreement that temporarily waived, prevented or resolved these defaults as described in
Note 19
and
Note 31
.
The most recent waiver extends through
April 5, 2019
.
To address our liquidity needs and the going concern uncertainty, we:
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raised gross proceeds of
$248.4 million
on April 30, 2018 through the rights offering as described in
Note 22
(the "2018 Rights Offering");
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repaid on May 4, 2018 the Second Lien Term Loan Facility described in
Note 21
that had been in default beginning March 1, 2018;
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completed the sale of our MEGTEC and Universal businesses on October 5, 2018, for
$130 million
, subject to adjustment, resulting in receipt of
$112.0 million
in cash, net of
$22.5 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;
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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
$38.9 million
in cash and
$4.9 million
, which was deposited in escrow pending final settlement of working capital and other customary matters;
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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;
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sold another non-core business for
$5.1 million
in the first quarter of 2018;
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initiated restructuring actions and other additional cost reductions since the second quarter of 2018 that are designed to save approximately
$84 million
annually;
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received
$30 million
in net proceeds from Tranche A-1 of Last Out Term Loans, described in
Note 20
, from B. Riley FBR, Inc., a related party, in September and October 2018 (Tranche A-1 was assigned to Vintage Capital Management LLC, another related party, on November 19, 2018);
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received
$10.0 million
in net proceeds from Tranche A-2 of the Last Out Term Loans, described in
Note 31
, from B. Riley Financial, Inc., a related party on March 20, 2019;
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reduced uncertainty and provided better visibility into our future liquidity requirements by turning over four of the six European Vølund loss contracts to the customers and negotiating settlement of the remaining two loss contracts in the first quarter of 2019 as described in
Note 7
; and
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entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in
Note 31
, the most recent of which extends through April 5, 2019, unless earlier terminated, and waives our compliance with a number of covenants and events of default under, the Amended Credit Agreement.
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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. We are currently dependent upon the waivers granted in our most recent limited waiver to maintain our current compliance with the covenants in the Amended Credit Agreement, and since March 20, 2019, we have also been nearly fully drawn on the U.S. Revolving Credit Facility, such that only minimal additional amounts were available for borrowings or letters of credit.
Based on our forecasts, we will require additional amendments to or waivers under the Amended Credit Agreement and additional financing to fund working capital and the settlements of two of our six European Vølund loss contracts described in
Note 7
prior to
April 5, 2019
to continue as a going concern. We are currently in active discussions with the lenders under the Amended Credit Agreement (including certain of our related parties) for additional financing, a waiver of our compliance with covenants in and events of default under the Amended Credit Agreement, a reduction of the minimum liquidity requirements that we must maintain, a reset of future financial covenant ratios and amendments to other covenant requirements in order to allow us to continue to operate as a going concern. Our current discussions have focused around the extension of
additional Last Out Term Loans, primarily from related parties, in an amount necessary to fund the settlement of the European Vølund loss contracts and provide liquidity for our operations. In connection with these loans, we have also discussed seeking shareholder approval for a reverse stock split and various other matters that could result in substantial dilution to our shareholders not participating in this financing, such as a rights offering to repay a portion of these additional Last Out Term Loans, the exchange of a portion of our existing Last Out Term Loans for shares of common stock and the issuance of warrants with a de minimis strike price to lenders participating in these additional Last Out Term Loans or other parties. We also discussed whether, as part of any financing transaction, we would provide director nomination rights over some or even a substantial majority of our board of directors to two of the related parties involved in these financing efforts or whether we would add an event of default if we fail to refinance the U.S. Revolving Credit Facility within twelve months following the filing of this annual report. These discussions have not yet resulted, and may never result, in a binding commitment by our lenders. There can be no assurance that our lenders or any other person will commit to provide additional financing consistent with these discussions or at all. If we are able to obtain additional financing, it may be on terms substantially different from our current discussions described above, and may require additional or different commitments by us with regard to other actions we will or will not take. If we fail to obtain necessary financing on acceptable terms or otherwise obtain short-term capital and continuing waivers with approval from our existing lenders, we may be unable to continue operation as a going concern.
In addition to the discussions regarding additional financing described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available.
NYSE Continued Listing Status
On November 27, 2018, we received written notification (the "NYSE Notice"), from the New York Stock Exchange (the "NYSE"), that we were not in compliance with an NYSE continued listing standard in Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock fell below
$1.00
over a period of
30
consecutive trading days. We informed the NYSE that we currently intend to seek to cure the price condition by executing our strategic plan, which is expected to result in improved operational and financial performance that we expect will ultimately lead to a recovery of our common stock price. We can regain compliance with the minimum per share average closing price standard at any time during the six-month cure period if, on the last trading day of any calendar month during the cure period, we have (i) a closing share price of at least $1.00 and (ii) an average closing price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. We informed the NYSE that we are also prepared to consider a reverse stock split to cure the deficiency, should such action be necessary, subject to approval of our shareholders, at our next annual meeting. Our common stock could also be delisted if our average market capitalization over a consecutive 30 trading-day period is less than
$15.0 million
, in which case we would not have an opportunity to cure the deficiency, our common stock would be suspended from trading on the NYSE immediately, and the NYSE would begin the process to delist our common
stock, subject to our right to appeal under NYSE rules. We cannot assure you that any appeal we undertake in these or other circumstances will be successful. While we are considering various options, it may take in a significant effort to cure this deficiency and regain compliance with this continued listing standard, and there can be no assurance that we will be able to cure this deficiency or if we will cease to comply with another NYSE continued listing standard.
NOTE 2
– SIGNIFICANT ACCOUNTING POLICIES
Reportable segments
We operate in
three
reportable segments. Our reportable segments are as follows:
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Babcock & Wilcox segment
:
focused on the supply of and aftermarket services for steam-generating, environmental and auxiliary equipment for power generation and other industrial applications. This segment was formerly named the Power segment.
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Vølund & Other 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. This segment was formerly named the Renewable segment.
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SPIG segment
:
focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services. SPIG was formerly part of the Industrial segment.
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For financial information about our segments see
Note 6
to our Consolidated Financial Statements.
Use of estimates
We use estimates and assumptions to prepare our Consolidated Financial Statements in conformity with GAAP. Some of our more significant estimates include our estimate of costs to complete long-term construction contracts, estimates associated with assessing whether goodwill and other long-lived assets are impaired, estimates of costs to be incurred to satisfy contractual warranty requirements, estimates of the value of acquired intangible and tangible assets, estimates associated with the realizability of deferred tax assets, estimates associated with determining the fair value of the transactions with American Industrial Partners, a related party (see
Note 21
), and estimates we make in selecting assumptions related to the valuations of our pension and postretirement plans, including the selection of our discount rates, mortality and expected rates of return on our pension plan assets. These estimates and assumptions affect the amounts we report in our Consolidated Financial Statements and accompanying notes. Our actual results could differ from these estimates. Variances could result in a material effect on our financial condition and results of operations in future periods.
Earnings per share
We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. We have a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units, performance shares, and performance units, subject to satisfaction of specific performance goals. We include the shares applicable to these plans in dilutive earnings per share when related performance criteria have been met.
Investments
Our investments primarily relate to our wholly owned insurance subsidiary. Our investments, which are primarily highly liquid money market instruments, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss). We classify investments available for current operations in the Consolidated Balance Sheets as current assets, while we classify investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other - net in our Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method. We include interest on securities in interest income.
Foreign currency translation
We translate assets and liabilities of our foreign operations into U.S. dollars at current exchange rates, and we translate items in our statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and losses in income. We have included transaction losses of
$(28.5) million
,
$(4.8) million
and
$(1.9) million
in the years ended
December 31, 2018
,
2017
and
2016
, respectively, in foreign exchange in our Consolidated Statements of Operations. These foreign exchange net gains and losses are primarily related to transaction gains or losses from unhedged intercompany loans when the loan is denominated in a currency different than the participating entity's functional currency.
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 Babcock & Wilcox and SPIG segments, accounted for
19%
,
18%
and
18%
of our revenue for the years ended December 31, 2018, 2017 and 2016, 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
81%
,
82%
and
82%
of our revenue for the years ended December 31, 2018, 2017 and 2016, 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 cost-to-cost input 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 cost-to-cost input 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 our Vølund & Other Renewable segment. Refer to
Note 6
for our disaggregation of revenue by product line.
As of
December 31, 2018
, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues using a cost-to-cost input method. 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.
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 enforcing the claim, the cause of any additional costs incurred and whether those costs are identifiable or otherwise determinable, the nature and reasonableness of those costs, the objective evidence available to support the amount of the claim, and our relevant history
with the counter-party that supports our expectations about their willingness and ability to pay for the additional cost along with a reasonable margin.
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 Consolidated Balance Sheets, includes revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in our Consolidated Balance Sheets, includes advance billings on contracts invoices that exceed accumulated contract costs and revenues and costs recognized under the cost-to-cost input method. Those balances are classified as current based on the life cycle of the associated contracts. 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 the collection of all amounts for unbilled revenues is deemed probable. We review contract price and cost estimates each reporting period as the work progresses and reflect adjustments proportionate to the costs incurred to date relative to total estimated costs at 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 through the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in other current liabilities in the 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 completion of a contract are included in other accrued liabilities, a current liability, in our Consolidated Balance Sheets.
Warranty expense
We accrue estimated expense included in cost of operations on our Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts. 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.
Research and development
Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations.
Research and development activities totaled
$3.8 million
,
$7.6 million
and
$8.8 million
in the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Pension plans and postretirement benefits
We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S., Canadian and U.K. subsidiaries. We use actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations use significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends.
We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. We use an alternative spot rate method for discounting the benefit obligation rather than a single equivalent discount rate because it more accurately applies each year's spot rates to the projected cash flows.
The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year, or as interim remeasurements are required, we recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost (mark to market adjustment). Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets.
We recognize the funded status of each plan as either an asset or a liability in the Consolidated Balance Sheets. The funded status is the difference between the fair value of plan assets and the present value of its benefit obligation, determined on a plan-by-plan basis. See
Note 18
for a detailed description of our plan assets.
Income taxes
Income tax expense for federal, foreign, state and local income taxes are calculated on pre-tax income based on the income tax law in effect at the latest balance sheet date and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess deferred taxes and the adequacy of the valuation allowance on a quarterly basis. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our Consolidated Financial Statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of provision for income taxes on our Consolidated Statements of Operations.
Cash and cash equivalents and restricted cash
Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them. We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.
Trade accounts receivable and allowance for doubtful accounts
Our trade accounts receivable balance is stated at the amount owed by our customers, net of allowances for estimated uncollectible balances. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management's evaluation of the ability of customers to make payments, with emphasis on historical remittance experience, known customer financial difficulties, the age of receivable balances and any other known factors specific to a receivable. Accounts receivable are charged to the allowance when it is determined they are no longer collectible. Our allowance for doubtful accounts was
$21.4 million
and
$11.6 million
at
December 31, 2018
and
2017
, respectively. In the fourth quarter of 2018, we increased the allowance for doubtful accounts by
$5.9 million
for the Chinese operations of the Babcock & Wilcox segment. Additionally in the fourth quarter of 2018, SPIG increased its allowance for doubtful accounts by
$9.3 million
related to projects in the Middle East. Amounts charged to selling, general and administrative expenses were $
15.5 million
for the year ended December 31, 2018. Amounts charged to selling, general and administrative expenses or deducted from the allowance were not significant to our statement of operations in the years ended December 31, 2017 and 2016.
Inventories
We carry our inventories at the lower of cost or market. We determine cost principally on the first-in, first-out basis, except for certain materials inventories of our Babcock & Wilcox segment, where we use the last-in, first-out ("LIFO") method. We determined the cost of approximately
22%
and
18%
of our total inventories using the LIFO method at December 31, 2018 and 2017, respectively, and our total LIFO reserve at December 31, 2018 and 2017 was approximately
$7.6 million
and
$7.0 million
, respectively. Our obsolete inventory reserve was
$7.9 million
and
$6.3 million
at December 31, 2018 and 2017, respectively. In the fourth quarter of 2018, we increased our inventory reserve by
$1.4 million
for the Chinese operations of the Babcock & Wilcox segment as a result of a strategic change in that business unit. The components of inventories can be found in
Note 12
.
Property, plant and equipment
We carry our property, plant and equipment at depreciated cost, less any impairment provisions. We depreciate our property, plant and equipment using the straight-line method over estimated economic useful lives of
eight
to
33 years
for buildings
and
three
to
28 years
for machinery and equipment. Our depreciation expense was
$21.8 million
,
$19.4 million
and
$18.7 million
for the years ended December 31, 2018, 2017 and 2016, respectively. We expense the costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset as we incur them.
Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business and result in future asset impairments.
Investments in unconsolidated joint ventures
We use the equity method of accounting for investments in joint ventures in which we are able to exert significant influence, but not control. Joint ventures in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost. We assess our investments in unconsolidated joint ventures for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other-than-temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated joint venture at fair value.
Goodwill
Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually or when impairment indicators are present. We may elect to perform a qualitative test when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we perform a quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. Beginning April 1, 2018, we adopted ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
Goodwill impairment tests after April 1, 2018 recognize impairment for the amount that the carrying value of a reporting unit exceeds its fair value up to the remaining amount of goodwill. Prior to April 1, 2018, we used a two-step impairment test. The first step of the test compared the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of the impairment loss, if any. The second step compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.
Intangible assets
Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and quantitatively tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to impairment testing at least annually or in interim periods when impairment indicators are present. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by quantitatively determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we recognize impairment for the amount of the difference.
Derivative financial instruments
Our global operations expose us to changes in foreign currency exchange ("FX") rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities' functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments and certain intercompany loans denominated in foreign currencies. We record these contracts at fair value on our Consolidated Balance Sheets and defer the related gains and losses in stockholders' equity as a component of accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value and any portion excluded from the assessment of effectiveness is immediately recognized in foreign exchange on our Consolidated Statements of Operations. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of foreign exchange in our Consolidated Statements of Operations.
Self-insurance
We have a wholly owned insurance subsidiary that provides employer's liability, general and automotive liability and workers' compensation insurance and, from time to time, builder's risk insurance (within certain limits) to our companies. We may also, in the future, have this insurance subsidiary accept other risks that we cannot or do not wish to transfer to outside insurance companies. Included in other liabilities on our Consolidated Balance Sheets are reserves for self-insurance totaling
$21.6 million
and
$23.1 million
at the years ended December 31, 2018 and 2017, respectively.
Loss contingencies
We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation, as discussed in
Note 23
. Our losses are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties; the attribution of damages, if any, among multiple defendants; plaintiffs, in most cases involving personal injury claims, do not specify the amount of damages claimed; the discovery process may take multiple years to complete; during the litigation process, it is common to have multiple complex unresolved procedural and substantive issues; the potential availability of insurance and indemnity coverages; the wide-ranging outcomes reached in similar cases, including the variety of damages awarded; the likelihood of settlements for de minimus amounts prior to trial; the likelihood of success at trial; and the likelihood of success on appeal. Consequently, it is possible future earnings could be affected by changes in our assessments of the probability that a loss has been incurred in a material pending litigation against us and/or changes in our estimates related to such matters.
Stock-based compensation
The fair value of equity-classified awards, such as restricted stock, performance shares and stock options, is determined on the date of grant and is not remeasured. The fair value of liability-classified awards, such as cash-settled stock appreciation rights, restricted stock units and performance units, is determined on the date of grant and is remeasured at the end of each reporting period through the date of settlement. Fair values for restricted stock, restricted stock units, performance shares and performance units are determined using the closing price of our common stock on the date of grant. Fair values for stock options are determined using a Black-Scholes option-pricing model ("Black-Scholes"). For performance shares or units granted in the years ended December 31, 2018 and 2017 that contain a Relative Total Shareholder Return vesting criteria and for stock appreciation rights, we utilize a Monte Carlo simulation to determine the fair value, which determines the probability of satisfying the market condition included in the award. The determination of the fair value of a share-based payment award using an option-pricing model or a Monte Carlo simulation requires the input of significant assumptions, such as the expected life of the award and stock price volatility.
We recognize expense for all stock-based awards granted on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. For liability-classified awards, changes in fair value are recognized through cumulative catch-ups each period. Excess tax benefits on stock-based compensation are to be presented as a financing cash flow, rather than as a reduction of taxes paid. These excess tax benefits result from tax deductions in excess of
the cumulative compensation expense recognized for options exercised and other equity-classified awards. See
Note 9
for further discussion of stock-based compensation.
Recently adopted accounting standards
Effective January 1, 2018, we adopted ASU 2014-09,
Revenue from Contracts with Customers
using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. The new accounting standard provides a comprehensive model to use in accounting for revenue from contracts with customers. 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. 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. See
Note 7
for additional accounting policy disclosures.
Effective January 1, 2018, we prospectively adopted ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which resulted in an immaterial impact on our financial results. 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.
Effective January 1, 2018, we adopted ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which resulted in an immaterial impact on our financial results. 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 requires 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.
Effective January 1, 2018, we retrospectively adopted 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. The only meaningful effect on our financial statements is related to the restricted cash received from the sale of BWBC as described in
Note 13
, which is reflected as investing cash flow. All other effects of adopting this new standard were immaterial. The detail of cash, cash equivalents, and restricted cash is included in
Note 26
.
Effective January 1, 2018, we retrospectively adopted 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 Babcock & Wilcox segment gross profit. The changes in the classification of the historical components of net periodic benefit costs from operating expense to other expense for the years ended December 31, 2017 and 2016 amounted to
$29.7 million
and
$4.2 million
, respectively, and are reflected in our Consolidated Statements of Operations. The components of cost and benefit from our pension and other postretirement plans are detailed together with the location in our Consolidated Statements of Operations in
Note 18
.
Effective April 1, 2018, we early adopted 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. See
Note 14
for further discussion of the goodwill impairment we recognized in 2018.
Effective October 1, 2018, we early adopted 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. The adoption of this ASU did not have a material impact on our financial statements or disclosures.
Effective October 1, 2018, we early adopted ASU 2018-13,
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)
. The new guidance provides modifications to the disclosure requirements in Topic 820, primarily related to assets measured at fair value under Level 3 of the fair value hierarchy. The adoption of this ASU did not have a material impact on our financial statements or disclosures.
NOTE 3
– 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:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per share amounts)
|
2018
|
2017
|
2016
|
Loss from continuing operations
|
$
|
(658,460
|
)
|
$
|
(382,068
|
)
|
$
|
(122,900
|
)
|
(Loss) income from discontinued operations, net of tax
|
(66,832
|
)
|
2,244
|
|
7,251
|
|
Net loss attributable to shareholders
|
$
|
(725,292
|
)
|
$
|
(379,824
|
)
|
$
|
(115,649
|
)
|
|
|
|
|
Weighted average shares used to calculate basic and diluted earnings per share
|
127,158
|
|
46,935
|
|
50,129
|
|
|
|
|
|
Basic and diluted loss per share - continuing operations
|
$
|
(5.18
|
)
|
$
|
(8.14
|
)
|
$
|
(2.45
|
)
|
Basic and diluted (loss) earnings per share - discontinued operations
|
(0.52
|
)
|
0.05
|
|
0.14
|
|
Basic and diluted loss per share
|
$
|
(5.70
|
)
|
$
|
(8.09
|
)
|
$
|
(2.31
|
)
|
Because we incurred a net loss in the years ended
December 31, 2018
,
2017
and
2016
, basic and diluted shares are the same. If we had net income in the years ended
December 31, 2018
,
2017
, and
2016
, diluted shares would include an additional
0.7 million
,
0.4 million
and
0.5 million
shares, respectively.
We excluded
2.9 million
,
2.0 million
and
3.4 million
shares related to stock options from the diluted share calculation for the years ended
December 31, 2018
,
2017
and
2016
, respectively, because their effect would have been anti-dilutive.
NOTE 4
– 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
$112.0 million
in cash, net of
$22.5 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.
Subsequent to October 5, 2018, changes in estimated working capital and other items have resulted in an estimated loss on sale and is presented in the table below in loss on sale of business.
Beginning with June 30, 2018, the MEGTEC and Universal businesses are classified as discontinued operations because the disposal represents a strategic shift that had a major effect on our operations; they were previously included in our Industrial segment, which has been renamed the SPIG segment because SPIG is the remaining business of the former Industrial segment. 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
, in our Consolidated Statements of Operations and is presented below as goodwill impairment.
The following table presents selected financial information regarding the discontinued operations included in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Revenue
|
$
|
170,908
|
|
$
|
216,306
|
|
$
|
157,322
|
|
Cost of operations
|
134,057
|
|
170,501
|
|
115,362
|
|
Selling, general and administrative
|
26,596
|
|
38,380
|
|
27,063
|
|
Goodwill impairment
|
72,309
|
|
—
|
|
—
|
|
Restructuring charge
|
—
|
|
408
|
|
1,994
|
|
Research and development
|
1,224
|
|
1,798
|
|
1,557
|
|
Loss (gain) on asset disposals
|
(1,991
|
)
|
2
|
|
(7
|
)
|
Operating (loss) income
|
(61,287
|
)
|
5,217
|
|
11,353
|
|
Loss on sale of business
|
(5,521
|
)
|
—
|
|
—
|
|
Income tax (benefit) expense
|
(233
|
)
|
1,107
|
|
4,237
|
|
Net (loss) income
|
(66,832
|
)
|
2,244
|
|
7,251
|
|
The following table presents the major classes of assets that have been presented as assets and liabilities of discontinued operations in our Consolidated Balance Sheets:
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
Cash and cash equivalents
|
$
|
12,950
|
|
Accounts receivable – trade, net
|
39,196
|
|
Accounts receivable – other
|
157
|
|
Contracts in progress
|
25,409
|
|
Inventories
|
9,245
|
|
Other current assets
|
1,515
|
|
Current assets of discontinued operations
|
88,472
|
|
Net property, plant and equipment
|
27,224
|
|
Goodwill
|
118,720
|
|
Deferred income taxes
|
359
|
|
Intangible assets
|
34,715
|
|
Other assets
|
18
|
|
Noncurrent assets of discontinued operations
|
181,036
|
|
Total assets of discontinued operations
|
$
|
269,508
|
|
|
|
Accounts payable
|
$
|
19,838
|
|
Accrued employee benefits
|
3,095
|
|
Advance billings on contracts
|
9,073
|
|
Accrued warranty expense
|
5,506
|
|
Other accrued liabilities
|
9,987
|
|
Current liabilities of discontinued operations
|
47,499
|
|
Pension and other accumulated postretirement benefit liabilities
|
6,388
|
|
Other noncurrent liabilities
|
6,612
|
|
Noncurrent liabilities of discontinued operations
|
13,000
|
|
Total liabilities of discontinued operations
|
$
|
60,499
|
|
The significant components of discontinued operations included in our Consolidated Statements of Cash Flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Depreciation and amortization
|
$
|
3,482
|
|
$
|
9,688
|
|
$
|
5,060
|
|
Goodwill impairment
|
72,309
|
|
—
|
|
—
|
|
Loss (gain) on asset disposals
|
(1,991
|
)
|
2
|
|
(7
|
)
|
Loss on sale of business
|
5,521
|
|
—
|
|
—
|
|
Benefit from deferred income taxes
|
(944
|
)
|
(359
|
)
|
(255
|
)
|
Purchase of property, plant equipment
|
(77
|
)
|
(1,254
|
)
|
(175
|
)
|
Acquisition of Universal, net of cash acquired
|
—
|
|
(52,547
|
)
|
—
|
|
NOTE 5
– DIVESTITURES AND ACQUISITIONS
Divestiture
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
$38.9 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 December 31, 2018. We recognized a
$39.8 million
pre-tax gain on sale of this business in 2018, net of
$0.8 million
of transaction costs. PBRRC was formerly part of the Vølund & Other Renewable segment and represented most of the operations and maintenance revenue for the years ended December 31, 2018, 2017 and 2016.
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 Vølund loss projects, as described in
Note 7
.
Acquisitions
Universal Acoustic & Emission Technologies, Inc.
On January 11, 2017, we acquired Universal Acoustic & Emission Technologies, Inc. ("Universal") for approximately
$52.5 million
in cash, funded primarily by borrowings under our United States revolving credit facility, net of
$4.4 million
cash acquired in the business combination. Transaction costs included in the purchase price were approximately
$0.2 million
. We accounted for the Universal acquisition using the acquisition method, whereby all of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill. In order to purchase Universal, we borrowed approximately
$55 million
under the U.S. Revolving Credit Facility in 2017.
Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures. At the acquisition date, Universal employed approximately
460
people, mainly in the United States and Mexico. During 2017, we integrated Universal with our Industrial segment. Universal contributed
$69.1 million
of revenue and
$14.5 million
of gross profit to our operating results in the year ended December 31, 2017. During 2018, Universal met the criteria for classification as a discontinued operation and was subsequently sold on October 5, 2018. See
Note 4
for additional information about discontinued operations and the sale of Universal.
The allocation of the purchase price based on the fair value of assets acquired and liabilities assumed is set forth below. We finalized the purchase price allocation associated with the valuation of certain intangible assets and deferred tax balances at
December 31, 2017; as a result, the provisional measurements of intangible assets, goodwill and deferred income tax balances did not change.
|
|
|
|
|
(in thousands)
|
Acquisition
date fair values
|
Cash
|
$
|
4,379
|
|
Accounts receivable
|
11,270
|
|
Contracts in progress
|
3,167
|
|
Inventories
|
4,585
|
|
Other assets
|
579
|
|
Property, plant and equipment
|
16,692
|
|
Goodwill
|
14,413
|
|
Identifiable intangible assets
|
19,500
|
|
Deferred income tax assets
|
935
|
|
Current liabilities
|
(10,833
|
)
|
Other noncurrent liabilities
|
(1,423
|
)
|
Deferred income tax liabilities
|
(6,338
|
)
|
Net acquisition cost
|
$
|
56,926
|
|
The intangible assets included above consist of the following:
|
|
|
|
|
|
|
Fair value (in thousands)
|
Weighted average
estimated useful life
(in years)
|
Customer relationships
|
$
|
10,800
|
|
15
|
Backlog
|
1,700
|
|
1
|
Trade names / trademarks
|
3,000
|
|
20
|
Technology
|
4,000
|
|
7
|
Total amortizable intangible assets
|
$
|
19,500
|
|
|
The acquisition of Universal resulted in an increase in our intangible asset amortization expense during the year ended December 31, 2017 of
$3.1 million
, which is included in cost of operations in our Consolidated Statement of Operations. Amortization of intangible assets is not allocated to segment results.
Approximately
$1.7 million
of acquisition and integration related costs of Universal was recorded as a component of our SG&A expenses in the Consolidated Statement of Operations in the year ended
December 31, 2017
.
The following unaudited pro forma financial information below represents our results of operations for year ended December 31, 2016 had the Universal acquisition occurred on January 1, 2016. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2016. This information should not be taken as representative of our future consolidated results of operations.
|
|
|
|
|
|
Year Ended
|
(in thousands)
|
December 31, 2016
|
Revenues
|
$
|
1,660,986
|
|
Net loss attributable to B&W
|
(113,940
|
)
|
Basic earnings per common share
|
(2.27
|
)
|
Diluted earnings per common share
|
(2.27
|
)
|
The unaudited pro forma results included in the table above reflect the following pre-tax adjustments to our historical results:
|
|
•
|
A net increase in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of
$2.8 million
in the year ended December 31, 2016.
|
|
|
•
|
Elimination of the historical interest expense recognized by Universal of
$0.4 million
in the year ended December 31, 2016.
|
|
|
•
|
Elimination of
$2.1 million
in transaction related costs recognized in the year ended
December 31, 2016
.
|
SPIG S.p.A.
On July 1, 2016, we acquired all of the outstanding stock of SPIG S.p.A. ("SPIG")
for
€155.0 million
(approximately
$172.1 million
)
in an all-cash transaction, which was
subject to post-closing adjustments. During September 2016,
€2.6 million
(approximately
$2.9 million
) of the transaction price was returned to B&W based on the difference between the actual working capital and pre-close estimates. Transaction costs included in the purchase price associated with closing the acquisition of SPIG on July 1, 2016 were approximately
$0.3 million
.
Based in Arona, Italy, SPIG is a global provider of custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. The acquisition of SPIG was consistent with B&W's goal to grow and diversify its technology-based offerings with new products and services in the industrial markets that are complementary to our core businesses.
In the year ended December 31, 2016, SPIG contributed
$96.3 million
of revenue and
$8.0 million
of gross profit.
We accounted for the SPIG acquisition using the acquisition method. All of the assets acquired and liabilities assumed were recognized at their estimated fair value as of the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. Several valuation methods were used to determine the fair value of the assets acquired and liabilities assumed. For intangible assets, we used the income method, which required us to forecast the expected future net cash flows for each intangible asset. These cash flows were then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the projected cash flows. Some of the more significant estimates and assumptions inherent in the income method include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset's economic life and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also required judgment as different types of intangible assets will have different useful lives, or indefinite useful lives.
The allocation of the purchase price, based on the fair value of assets acquired and liabilities assumed, is detailed below.
|
|
|
|
|
(in thousands)
|
Acquisition
date fair values
|
Cash
|
$
|
25,994
|
|
Accounts receivable
|
58,843
|
|
Contracts in progress
|
61,155
|
|
Inventories
|
2,554
|
|
Other assets
|
7,341
|
|
Property, plant and equipment
|
6,104
|
|
Goodwill
|
72,401
|
|
Identifiable intangible assets
|
55,164
|
|
Deferred income tax assets
|
5,550
|
|
Revolving debt
|
(27,530
|
)
|
Current liabilities
|
(56,323
|
)
|
Advance billings on contracts
|
(15,226
|
)
|
Other noncurrent liabilities
|
(379
|
)
|
Deferred income tax liabilities
|
(17,120
|
)
|
Noncontrolling interest in joint venture
|
(7,754
|
)
|
Net acquisition cost
|
$
|
170,774
|
|
We finalized the purchase price allocation as of December 31, 2016, which resulted in a
$2.5 million
increase in goodwill. The goodwill arising from the purchase price allocation of the SPIG acquisition is believed to be a result of the synergies created from combining its operations with B&W's, and the growth it can
provide from its wide scope of engineered cooling and service offerings and customer base.
None
of this goodwill is expected to be deductible for tax purposes. Also, see
Note 14
for the results of our subsequent goodwill impairment assessments.
The intangible assets included above consist of the following:
|
|
|
|
|
|
|
(in thousands)
|
Fair value (in thousands)
|
|
Weighted average
estimated useful life
(in years)
|
Customer relationships
|
$
|
12,217
|
|
|
9
|
Backlog
|
17,769
|
|
|
2
|
Trade names / trademarks
|
8,885
|
|
|
20
|
Technology
|
14,438
|
|
|
10
|
Non-compete agreements
|
1,666
|
|
|
3
|
Internally-developed software
|
189
|
|
|
3
|
Total amortizable intangible assets
|
$
|
55,164
|
|
|
|
The acquisition of SPIG added
$5.2 million
,
$9.1 million
and
$13.3 million
of intangible asset amortization expense in the years ended December 31, 2018, 2017 and 2016, respectively. Amortization of intangible assets is not allocated to segment results.
Approximately
$1.6 million
and
$3.5 million
of acquisition and integration related costs of SPIG was recorded as selling, general and administrative expenses in the Consolidated Statement of Operations for the years ended December 31, 2017 and 2016, respectively.
The following unaudited pro forma financial information below represents our results of operations for year ended
December 31, 2016
had the SPIG acquisition occurred on January 1, 2016. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2016. This information should not be taken as representative of our future consolidated results of operations.
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2016
|
Revenues
|
|
$
|
1,663,126
|
|
Net loss attributable to B&W
|
|
(111,500
|
)
|
Basic earnings per common share
|
|
(2.22
|
)
|
Diluted earnings per common share
|
|
(2.22
|
)
|
The unaudited pro forma results included in the table above reflect the following pre-tax adjustments to our historical results:
|
|
•
|
A net increase (decrease) in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of
$6.5 million
in the year ended December 31, 2016.
|
|
|
•
|
Elimination of the historical interest expense recognized by SPIG of
$0.5 million
in the year ended December 31, 2016.
|
|
|
•
|
Elimination of
$3.5 million
in transaction related costs recognized in the year ended December 31, 2016.
|
NOTE 6
– SEGMENT REPORTING
Our operations are assessed based on
three
reportable segments which are summarized as follows:
|
|
•
|
Babcock & Wilcox segment
:
focused on the supply of and aftermarket services for steam-generating, environmental and auxiliary equipment for power generation and other industrial applications. This segment was formerly named the Power segment.
|
|
|
•
|
Vølund & Other 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. This segment was formerly named the Renewable segment.
|
|
|
•
|
SPIG segment
:
focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services. This segment was formerly part of the Industrial segment.
|
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 Babcock & Wilcox segment elimination is revenue associated with construction services. The primary component of total eliminations is associated with Babcock & Wilcox segment construction services provided to the SPIG segment. An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Revenues:
|
|
|
|
Babcock & Wilcox segment
|
|
|
|
Retrofits
|
$
|
223,516
|
|
$
|
306,758
|
|
$
|
392,854
|
|
New build utility and environmental
|
155,695
|
|
155,886
|
|
292,302
|
|
Aftermarket parts and field engineering services
|
271,028
|
|
277,129
|
|
292,535
|
|
Industrial steam generation
|
129,648
|
|
123,127
|
|
107,267
|
|
Eliminations
|
(25,311
|
)
|
(41,838
|
)
|
(102,980
|
)
|
|
754,576
|
|
821,062
|
|
981,978
|
|
Vølund & Other Renewable segment
|
|
|
|
Renewable new build and services
|
137,565
|
|
282,228
|
|
284,684
|
|
Operations and maintenance services
|
44,507
|
|
64,970
|
|
65,814
|
|
Eliminations
|
(890
|
)
|
—
|
|
(1,326
|
)
|
|
181,182
|
|
347,198
|
|
349,172
|
|
SPIG segment
|
|
|
|
New build cooling systems
|
112,758
|
|
126,674
|
|
19,961
|
|
Aftermarket cooling system services
|
40,867
|
|
54,811
|
|
76,330
|
|
|
153,625
|
|
181,485
|
|
96,291
|
|
|
|
|
|
Eliminations
|
(26,995
|
)
|
(8,316
|
)
|
(6,500
|
)
|
|
$
|
1,062,388
|
|
$
|
1,341,429
|
|
$
|
1,420,941
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Gross profit (loss)
(1)
:
|
|
|
|
Babcock & Wilcox segment
|
$
|
141,054
|
|
$
|
171,008
|
|
$
|
213,541
|
|
Vølund & Other Renewable segment
|
(238,125
|
)
|
(128,205
|
)
|
(68,109
|
)
|
SPIG segment
|
(25,113
|
)
|
(7,967
|
)
|
8,026
|
|
Intangible amortization expense included in cost of operations
|
(6,055
|
)
|
(10,618
|
)
|
(15,192
|
)
|
Inventory reserve for strategic change in China
|
(1,405
|
)
|
—
|
|
—
|
|
|
(129,644
|
)
|
24,218
|
|
138,266
|
|
|
|
|
|
Selling, general and administrative ("SG&A") expenses
|
(198,200
|
)
|
(218,060
|
)
|
(216,486
|
)
|
Financial advisory services included in SG&A
|
(18,625
|
)
|
(2,659
|
)
|
—
|
|
Trade receivable reserve in SG&A for Chinese operations
|
(5,845
|
)
|
—
|
|
—
|
|
Intangible amortization expense included in SG&A
|
(661
|
)
|
(426
|
)
|
(598
|
)
|
Goodwill and other intangible asset impairment
|
(40,046
|
)
|
(86,903
|
)
|
—
|
|
Restructuring activities and spin-off transaction costs
|
(16,758
|
)
|
(15,039
|
)
|
(38,813
|
)
|
Research and development costs
|
(3,780
|
)
|
(7,614
|
)
|
(8,849
|
)
|
(Loss) gain on asset disposals, net
|
(1,438
|
)
|
(13
|
)
|
25
|
|
Equity in income and impairment of investees
|
(11,603
|
)
|
(9,867
|
)
|
16,440
|
|
Operating loss
|
$
|
(426,600
|
)
|
$
|
(316,363
|
)
|
$
|
(110,015
|
)
|
(1)
Intangible amortization is not allocated to the segments' gross profit, but depreciation is allocated to the segments' gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Adjusted EBITDA
|
|
|
|
|
|
Babcock & Wilcox segment
(1)
|
$
|
83,640
|
|
$
|
103,294
|
|
$
|
130,735
|
|
Vølund & Other Renewable segment
|
(276,266
|
)
|
(170,344
|
)
|
(105,102
|
)
|
SPIG segment
|
(53,406
|
)
|
(29,792
|
)
|
1,862
|
|
Corporate
(2)
|
(26,876
|
)
|
(36,147
|
)
|
(35,343
|
)
|
Research and development costs
|
(3,780
|
)
|
(7,614
|
)
|
(8,849
|
)
|
Foreign exchange
|
(28,542
|
)
|
(4,751
|
)
|
(1,944
|
)
|
Other – net
|
259
|
|
(698
|
)
|
(616
|
)
|
|
(304,971
|
)
|
(146,052
|
)
|
(19,257
|
)
|
|
|
|
|
|
|
Depreciation & amortization
|
(28,521
|
)
|
(30,449
|
)
|
(34,523
|
)
|
Interest expense, net
|
(49,364
|
)
|
(25,426
|
)
|
(2,900
|
)
|
Loss on debt extinguishment
|
(49,241
|
)
|
—
|
|
—
|
|
Restructuring activities and spin-off transaction costs
|
(16,758
|
)
|
(15,039
|
)
|
(38,813
|
)
|
Financial advisory services included in SG&A
|
(18,625
|
)
|
(2,659
|
)
|
—
|
|
Acquisition and integration costs included in SG&A
|
—
|
|
(1,522
|
)
|
—
|
|
Reserves for strategic change in China
|
(7,250
|
)
|
—
|
|
—
|
|
MTM (loss) gain from benefit plans
|
(67,474
|
)
|
8,706
|
|
(24,159
|
)
|
Goodwill and other intangible asset impairment
|
(40,046
|
)
|
(86,903
|
)
|
—
|
|
Impairment of equity method investment in TBWES
|
(18,362
|
)
|
(18,193
|
)
|
—
|
|
Gain on sale of equity method investment in BWBC
|
6,509
|
|
—
|
|
—
|
|
Gain on sale of business
|
39,815
|
|
—
|
|
—
|
|
(Loss) gain on asset disposal
|
(1,513
|
)
|
(13
|
)
|
25
|
|
Loss before income tax expense
|
(555,801
|
)
|
(317,550
|
)
|
(119,627
|
)
|
Income tax expense (benefit)
|
102,224
|
|
63,709
|
|
2,706
|
|
Loss from continuing operations
|
(658,025
|
)
|
(381,259
|
)
|
(122,333
|
)
|
(Loss) income from discontinued operations, net of tax
|
(66,832
|
)
|
2,244
|
|
7,251
|
|
Net loss
|
(724,857
|
)
|
(379,015
|
)
|
(115,082
|
)
|
Net income attributable to noncontrolling interest
|
(435
|
)
|
(809
|
)
|
(567
|
)
|
Net loss attributable to stockholders
|
$
|
(725,292
|
)
|
$
|
(379,824
|
)
|
$
|
(115,649
|
)
|
(1)
Babcock & Wilcox segment adjusted EBITDA includes
$25.4 million
,
$21.0 million
and
$20.0 million
of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, in the years ended
December 31, 2018
, 2017 and 2016, respectively.
(2)
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the SPIG segment have been included with other unallocated costs in Corporate, and total
$11.4 million
,
$8.8 million
and
$4.3 million
in the years ended
December 31, 2018
, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
Babcock & Wilcox segment
|
$
|
16,047
|
|
$
|
13,871
|
|
$
|
15,906
|
|
Vølund & Other Renewable segment
|
4,301
|
|
4,633
|
|
3,979
|
|
SPIG segment
|
7,092
|
|
11,126
|
|
14,014
|
|
Segment depreciation and amortization
|
27,440
|
|
29,630
|
|
33,899
|
|
Corporate
|
1,081
|
|
819
|
|
624
|
|
Total depreciation and amortization
|
$
|
28,521
|
|
$
|
30,449
|
|
$
|
34,523
|
|
We do not separately identify or report our assets by segment as our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is measured.
We provide our products and services to a diverse customer base that includes utilities and other power producers located around the world. We have one customer in the Babcock & Wilcox segment, Southern Company, with revenues of
$138.1 million
that accounted for
13%
of our consolidated revenue for the year ended December 31, 2018. We have no customers that individually accounted for more than 10% of our consolidated revenues in the years ended December 31,
2017
, or
2016
.
Information about our consolidated operations in different geographic areas
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
REVENUES
(1)
|
|
|
|
United States
|
$
|
652,879
|
|
$
|
615,089
|
|
$
|
771,453
|
|
United Kingdom
|
64,465
|
|
183,755
|
|
196,000
|
|
Canada
|
90,459
|
|
95,763
|
|
62,822
|
|
Sweden
|
34,578
|
|
36,284
|
|
21,049
|
|
China
|
23,432
|
|
48,161
|
|
27,423
|
|
Germany
|
14,690
|
|
21,867
|
|
25,020
|
|
Italy
|
14,164
|
|
11,112
|
|
6,004
|
|
Denmark
|
12,426
|
|
82,058
|
|
53,824
|
|
Nigeria
|
12,211
|
|
6,754
|
|
—
|
|
Taiwan - Republic of China
|
11,690
|
|
528
|
|
718
|
|
Finland
|
10,161
|
|
6,808
|
|
5,434
|
|
Brazil
|
9,042
|
|
2,927
|
|
1,806
|
|
Belgium
|
8,226
|
|
288
|
|
300
|
|
Saudi Arabia
|
8,035
|
|
13,648
|
|
791
|
|
Vietnam
|
5,764
|
|
15,762
|
|
54,691
|
|
South Korea
|
5,678
|
|
41,217
|
|
44,657
|
|
India
|
5,642
|
|
3,116
|
|
4,254
|
|
Chile
|
5,597
|
|
3,403
|
|
3,721
|
|
Bahrain
|
5,286
|
|
7
|
|
—
|
|
Egypt
|
2,133
|
|
43,122
|
|
35,833
|
|
Aggregate of all other countries,
each with less than $5 million in revenues
|
65,830
|
|
109,760
|
|
105,141
|
|
|
$
|
1,062,388
|
|
$
|
1,341,429
|
|
$
|
1,420,941
|
|
(1)
We allocate geographic revenues based on the location of the customer's operations.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
NET PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
United States
|
$
|
43,070
|
|
$
|
60,611
|
|
$
|
67,249
|
|
Mexico
|
20,458
|
|
21,950
|
|
22,594
|
|
China
|
8,720
|
|
10,093
|
|
13,460
|
|
United Kingdom
|
5,671
|
|
6,498
|
|
6,237
|
|
Denmark
|
7,372
|
|
7,954
|
|
6,749
|
|
Aggregate of all other countries, each with less than
$5 million of net property, plant and equipment
|
5,601
|
|
7,601
|
|
5,683
|
|
|
$
|
90,892
|
|
$
|
114,707
|
|
$
|
121,972
|
|
NOTE 7
– 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 year ended December 31, 2018.
Contract Balances
The following represents the components of our contracts in progress and advance billings on contracts included in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in thousands)
|
2018
|
2017
|
$ Change
|
% Change
|
Contract assets - included in contracts in progress:
|
|
|
|
|
Costs incurred less costs of revenue recognized
|
$
|
49,910
|
|
$
|
69,577
|
|
$
|
(19,667
|
)
|
(28
|
)%
|
Revenues recognized less billings to customers
|
94,817
|
|
66,234
|
|
28,583
|
|
43
|
%
|
Contracts in progress
|
$
|
144,727
|
|
$
|
135,811
|
|
$
|
8,916
|
|
7
|
%
|
Contract liabilities - included in advance billings on contracts:
|
|
|
|
|
Billings to customers less revenues recognized
|
$
|
140,933
|
|
$
|
168,880
|
|
$
|
(27,947
|
)
|
(17
|
)%
|
Costs of revenue recognized less cost incurred
|
8,434
|
|
3,117
|
|
5,317
|
|
171
|
%
|
Advance billings on contracts
|
$
|
149,367
|
|
$
|
171,997
|
|
$
|
(22,630
|
)
|
(13
|
)%
|
|
|
|
|
|
Net contract balance
|
$
|
(4,640
|
)
|
$
|
(36,186
|
)
|
$
|
31,546
|
|
(87
|
)%
|
|
|
|
|
|
Accrued contract losses
|
$
|
61,651
|
|
$
|
40,634
|
|
$
|
21,017
|
|
52
|
%
|
The impact of adopting Topic 606 on components of our contracts in progress and advance billings on contracts was not material at January 1, 2018. The change in our net contract balance was primarily driven by revenues recognized during 2018 that were included in contract liabilities at the beginning of the period and exceeded the receipt of new advanced payments from customers.
Backlog
On December 31, 2018 we had
$782 million
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
54%
,
12%
and
34%
of our remaining performance obligations as revenue in the remainder of 2019, 2020 and thereafter, respectively. Backlog reduced by approximately
$467 million
in September 2018 as a result of the sale of PBRRC described in
Note 5
.
Changes in Contract Estimates
In the years ended
December 31, 2018
,
2017
and
2016
, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Increases in gross profits for changes in estimates for over time contracts
|
$
|
18,183
|
|
$
|
21,638
|
|
$
|
42,368
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(262,389
|
)
|
(174,906
|
)
|
(149,169
|
)
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
(244,206
|
)
|
$
|
(153,268
|
)
|
$
|
(106,801
|
)
|
Vølund Loss Contracts
We had
four
Vølund contracts for renewable energy facilities in Europe that were loss contracts at December 31, 2016. During 2017,
two
additional Vølund contracts in Europe became loss contracts. In the years ended
December 31, 2018
, 2017, and 2016, we recorded
$233.0 million
and
$158.5 million
and
$141.1 million
in net losses, respectively, inclusive of warranty expense as described in
Note 17
, resulting from changes in the estimated revenues and costs to complete the
six
European Vølund loss contracts. These changes in estimates in the years ended
December 31, 2018
, 2017 and 2016 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these
six
contracts by
$11.5 million
,
$41.3 million
and
$35.8 million
, respectively. The total anticipated liquidated damages associated with these six contracts were
$88.6 million
and
$77.1 million
at
December 31, 2018
and
December 31, 2017
, respectively. During the year ended December 31, 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.
As of March 2019, four of the six Vølund loss contracts had been turned over to the customer, with only punch list or agreed remediation items remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. This applies to the first, third, fourth and sixth loss contracts. The customers for the second and f
i
fth loss contracts are related parties, and a settlement agreement was reached on
March 29, 2019
to limit our remaining risk related to these contracts. Under that settlement agreement, we agreed to pay a combined
£70 million
(
$88.9 million
)
by April 5, 2019 in exchange for limiting and further defining our obligations under these second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately
$144 million
), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by a specified date, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminates all historical claims and remaining liquidated damages. Upon completion of these activities in accordance with the settlement, we will have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed.
We estimated the portion of this settlement related to waiver of the rejection right on the fifth project was
$81.1 million
, which was recorded in the fourth quarter of 2018 as a reduction in the selling price.
We are still pursuing insurance recoveries and claims against subcontractors. For the second loss project, the settlement limits the remaining performance obligations and settled historic claims for nonconformance and delays, and we expect to turn over the plant in May 2019 and then begin the operations and maintenance contract that follows turnover of this plant.
Additional engineering or core scope services, may be provided by us on the fifth loss contract on commercially acceptable terms. We will provide operations and maintenance services under an existing contract for the fifth loss project if properly notified and the plant is used as a biomass plant as designed.
As of
December 31, 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
December 31, 2018
, this contract is approximately
95%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017, and as of December 31, 2018 was only pending customer agreement that contractual trial operations and takeover activities and requirements had been met. A settlement was reached with the customer to achieve takeover on January 31, 2019, after which only punch list items and other agreed to remediation items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. As of January 31, 2019, the contract is in the warranty phase. During the year ended
December 31, 2018
, we recognized additional contract losses of
$31.8 million
on the contract as a result of differences in actual and
estimated costs, schedule delays and issues encountered during preparation for and completion of formal trial operations. Losses in the year ended
December 31, 2018
also related to increases in expected warranty costs. Our estimate at completion as of
December 31, 2018
includes
$9.2 million
of total expected liquidated damages. As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$4.9 million
. In the year ended
December 31, 2017
, we recognized additional contract losses of
$20.8 million
as a result of differences in actual and estimated costs and schedule delays. As of
December 31, 2017
, this contract had
$1.6 million
of accrued losses and was
98%
complete. In the year ended December 31, 2016, we recognized charges of
$50.3 million
(net of accrued insurance proceeds), and as of December 31, 2016, this project had
$6.4 million
of accrued losses and was
88%
complete.
The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
December 31, 2018
, this contract was approximately
95%
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 are expected to begin in early April 2019 and takeover by the customer is expected in May 2019. This project is subject to the
March 29, 2019
settlement agreement described above. During the year ended
December 31, 2018
, we recognized additional contract losses of
$21.7 million
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 year ended December 31, 2018 also related to increases in expected warranty costs and subcontractor productivity being lower than previous estimates. Our estimate at completion as of
December 31, 2018
includes
$19.0 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
December 31, 2018
and 2017 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$3.9 million
. In the year ended
December 31, 2017
, we recognized contract losses of
$47.8 million
from changes in the expected selling price, construction cost estimates and schedule delays, and as of
December 31, 2017
, this contract had
$12.8 million
of accrued losses and was
81%
complete. In the year ended December 31, 2016, we recognized charges of
$28.1 million
, and as of December 31, 2016, this project had
$5.1 million
of accrued losses and was
67%
complete.
The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of
December 31, 2018
, this contract was approximately
99%
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. 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. The contract is now in the warranty phase. During the year ended
December 31, 2018
, we recognized additional contract losses of
$6.9 million
as a result of changes in the estimated costs at completion. Our estimate at completion as of
December 31, 2018
includes
$6.8 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$0.5 million
. In the year ended
December 31, 2017
, we recognized charges of
$10.2 million
from changes in our estimate at completion, and as of
December 31, 2017
, this contract had
$0.7 million
of accrued losses and was
98%
complete. In the year ended December 31, 2016, we recognized charges of
$30.1 million
, and as of December 31, 2016, this project had
$3.9 million
of accrued losses and was
82%
complete.
The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
December 31, 2018
, this contract was approximately
96%
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 occurred in February 2019, after which only punch list items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. During the year ended
December 31, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in
$31.3 million
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 year ended December 31, 2018 also include increases in expected warranty costs and subcontractor productivity being lower than previous estimates. Our estimate at completion as of
December 31, 2018
includes
$21.2 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
December 31, 2018
and December 31, 2017 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$2.1 million
. In the year ended
December 31, 2017
, we recognized contract losses of
$26.0 million
from changes in the expected selling price, changes in construction cost estimates and schedule delays, and as of
December 31, 2017
, this contract had
$4.7 million
of accrued losses and was
85%
complete. In the year ended
December 31, 2016, we recognized charges of
$16.4 million
, and as of December 31, 2016, this project had
$1.6 million
of accrued losses and was
61%
complete.
The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
December 31, 2018
, this contract was approximately
76%
complete. This project is subject to the
March 29, 2019
settlement agreement described above.
We estimated the portion of this settlement related to waiver of the rejection right on the fifth project was
$81.1 million
, which was recorded in the fourth quarter of 2018 as a reduction in the selling price.
Under the settlement, our remaining performance obligations were limited to support construction services to complete certain key systems of the plant by a specified date. The settlement also eliminates all historical claims and remaining liquidated damages. During the twelve months ended December 31, 2018, we revised our estimated revenue and costs at completion for this loss contract which resulted in
$119.5 million
of additional contract losses, including waiver of rejection rights, 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 to begin repairs to failed steel beam that failed in September 2017, which are described in more detail below. Losses in the twelve months ended December 31, 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
December 31, 2018
, includes
$13.3 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$36.8 million
. In the year ended
December 31, 2017
, we recognized charges of
$40.2 million
, respectively from changes in our estimate at completion, and as of
December 31, 2017
, this contract had
$14.3 million
of accrued losses and was
64%
complete.
The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
December 31, 2018
, this contract was approximately
95%
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. Trial operations began in December 2018 and customer takeover occurred on January 25, 2019, after which only punch list items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. The contract is in the warranty phase. During the year ended
December 31, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$22.0 million
due to challenges in startup commissioning activities. Losses in the year ended December 31, 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
December 31, 2018
includes
$19.1 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$1.4 million
. In the year ended
December 31, 2017
, we recognized additional contract losses of
$18.5 million
from changes in our estimate at completion, and as of
December 31, 2017
, this contract had
$2.5 million
of accrued losses and was
76%
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
$37 million
, which is included in the
December 31, 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 years ended December 31, 2018, 2017 and 2016, we recognized losses of
$2.3 million
,
$2.5 million
and
$14.2 million
, respectively, on our other Vølund renewable energy projects that are not loss contracts. Accrued liquidated damages associated with these projects was
$9.0 million
at December 31, 2016.
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 Vølund 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 receivable was recorded in 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 consolidated balance sheet, offset by a
$12.3 million
reserve at
December 31, 2018
.
SPIG U.S. Loss Contract
At December 31, 2018, SPIG had
one
significant loss contract, a contract to
engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S.
At December 31, 2018, the design and procurement are substantially complete, and the construction is underway. Overall, the contract is
69%
complete and it is expected be fully complete in mid-2019. Total losses of
$14.8 million
were recorded in 2018, of which
$9.1 million
were recorded in the fourth quarter of 2018, from changes in estimated cost to complete primarily from schedule delays, lower construction labor productivity and material quality. As of December 31, 2018, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$4.6 million
related to this contract. Construction is being performed by the Babcock & Wilcox segment, but the contract loss is included in the SPIG segment.
NOTE 8
– RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
In the years ended December 31, 2018, 2017 and 2016, we recognized restructuring activities and spin-off transaction costs of
$16.8 million
,
$15.0 million
and
$38.8 million
, respectively. The following tables summarize the restructuring activity and spin-off costs incurred by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year ended December 31, 2018
|
Severance and related costs
|
Exit costs
|
Impairment costs
|
Spin-off transaction costs
|
Total
|
Babcock & Wilcox segment
|
$
|
7,616
|
|
$
|
177
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,793
|
|
Vølund & Other Renewable segment
|
469
|
|
—
|
|
—
|
|
—
|
|
469
|
|
SPIG segment
|
2,506
|
|
—
|
|
—
|
|
—
|
|
2,506
|
|
Corporate
|
5,461
|
|
199
|
|
—
|
|
330
|
|
5,990
|
|
|
$
|
16,052
|
|
$
|
376
|
|
$
|
—
|
|
$
|
330
|
|
$
|
16,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year ended December 31, 2017
|
Severance and related costs
|
Exit costs
|
Impairment costs
|
Spin-off transaction costs
|
Total
|
Babcock & Wilcox segment
|
$
|
7,788
|
|
$
|
1,708
|
|
$
|
731
|
|
$
|
—
|
|
$
|
10,227
|
|
Vølund & Other Renewable segment
|
2,997
|
|
—
|
|
—
|
|
—
|
|
2,997
|
|
SPIG segment
|
65
|
|
—
|
|
—
|
|
—
|
|
65
|
|
Corporate
|
547
|
|
—
|
|
—
|
|
1,203
|
|
1,750
|
|
|
$
|
11,397
|
|
$
|
1,708
|
|
$
|
731
|
|
$
|
1,203
|
|
$
|
15,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year ended December 31, 2016
|
Severance and related costs
|
Exit costs
|
Impairment costs
|
Spin-off transaction costs
|
Total
|
Babcock & Wilcox segment
|
$
|
14,311
|
|
$
|
3,972
|
|
$
|
14,907
|
|
$
|
—
|
|
$
|
33,190
|
|
Vølund & Other Renewable segment
|
608
|
|
—
|
|
—
|
|
—
|
|
608
|
|
SPIG segment
|
31
|
|
—
|
|
—
|
|
—
|
|
31
|
|
Corporate
|
351
|
|
816
|
|
—
|
|
3,817
|
|
4,984
|
|
|
$
|
15,301
|
|
$
|
4,788
|
|
$
|
14,907
|
|
$
|
3,817
|
|
$
|
38,813
|
|
In 2018, we began to implement a series of cost restructuring actions, primarily in our U.S., European, Canadian and Asian operations, and corporate functions. 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 taken through December 31, 2018 is expected to total approximately
$9.1 million
, of which
$7.2 million
was recorded in the year ended
December 31, 2018
and the remainder will be recorded mainly in 2019 over the remaining service periods. Severance payments are expected to extend through mid-2019. In addition, executive severance totaling
$5.3 million
in the year ended
December 31, 2018
related to the elimination of the SVP and Chief Business Development Officer role and the transition of
two
CEO roles in 2018. Severance payments are expected to extend through late-2019.
The remainder of the restructuring costs in the year ended
December 31, 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 Vølund's workforce to align with a new execution model focused on 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 years ended
December 31, 2017
and 2016, 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 Babcock & Wilcox 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 Babcock & Wilcox 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 consolidated balance sheets. Activity related to the restructuring liabilities is as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
2,244
|
|
$
|
1,809
|
|
Restructuring expense
|
16,415
|
|
13,515
|
|
Payments
|
(11,300
|
)
|
(13,080
|
)
|
Balance at December 31
|
$
|
7,359
|
|
$
|
2,244
|
|
For the year ended December 31, 2016, we recorded cash restructuring charges of
$19.9 million
that impacted the accrued restructuring liability.
Accrued restructuring liabilities at
December 31, 2018
and
2017
relate primarily to employee termination benefits. Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring
liability. We did
no
t recognize non-cash restructuring expense in 2018. In the years ended December 31, 2017 and 2016, we recognized
$0.3 million
, and
$15.0 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, now known as BWX Technologies, Inc. or "BWXT". In the years ended
December 31, 2018
, 2017, and 2016, we recognized spin-off costs of
$0.3 million
,
$1.2 million
, and
$3.8 million
respectively. In each of the years ended
December 31, 2018
and 2017, we disbursed
$1.9 million
of the accrued retention awards.
NOTE 9
– STOCK-BASED COMPENSATION
2015 Long-Term Incentive Plan of Babcock & Wilcox Enterprises, Inc.
Prior to the spin-off from our former parent, BWXT, executive officers, key employees, members of the board of directors and consultants of the Company were eligible to participate in the 2010 Long-Term Incentive Plan of The Babcock & Wilcox Company (the "BWXT Plan"). Effective June 30, 2015, executive officers, key employees, members of the board of directors and consultants of the Company are eligible to participate in the 2015 Long-Term Incentive Plan of Babcock & Wilcox Enterprises, Inc. (the "BW Plan"). The BW Plan permits grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and cash incentive awards. The BW Plan was amended and restated in 2018 and 2016 to increase the number of shares available for issuance by
1.0 million
shares and
2.5 million
shares, respectively. The number of shares available for award grants under the BW Plan, as amended and restated, is
9.3 million
, of which
3.7 million
remain available as of
December 31, 2018
.
In connection to the 2018 Rights Offering, as described in
Note 22
, eligible participants of the BWXT Plan with outstanding stock options, restricted stock units, and performance-based share awards were awarded with additional corresponding shares to preserve the value of the employees outstanding equity.
In connection with the spin-off, outstanding stock options and restricted stock units granted under the BWXT Plan prior to 2015 were replaced with both an adjusted BWXT award and a new BW stock award. These awards, when combined, had terms that were intended to preserve the values of the original awards. Outstanding performance share awards originally issued under the BWXT Plan granted prior to 2015 were generally converted into unvested rights to receive the value of deemed target performance in unrestricted shares of a combination of BWXT common stock and BW common stock, determined by reference to the ratio of one share of BW common stock being distributed for every two shares of BWXT common stock in the spin-off, in each case with the same vesting terms as the original awards.
Stock options
Stock options were awarded in 2018 and 2016. There were no stock options awarded in
2017
. The fair value of each option grant awarded in 2018 and
2016
was estimated at the date of grant using Black-Scholes, with the following weighted-average assumptions:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
2016
|
Risk-free interest rate
|
2.69
|
%
|
1.14
|
%
|
Expected volatility
|
64
|
%
|
25
|
%
|
Expected life of the option in years
|
3.95
|
|
3.95
|
|
Expected dividend yield
|
—
|
%
|
—
|
%
|
The risk-free interest rate is based on the implied yield on a United States Treasury
zero
-coupon issue with a remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant. This amount is
zero
in 2018 and
2016
because we did not expect to pay dividends on the dates the 2018 and
2016
stock options were awarded.
The following table summarizes activity for our stock options the year ending
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual Term
(in years)
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at beginning of period
|
2,478
|
|
$
|
18.28
|
|
|
|
Granted
|
445
|
|
4.67
|
|
|
|
Exercised
|
—
|
|
—
|
|
|
|
Cancelled/expired/forfeited
|
(877
|
)
|
7.99
|
|
|
|
Rights offering equitable adjustment
|
2,346
|
|
—
|
|
|
|
Outstanding at end of period
|
4,392
|
|
$
|
10.54
|
|
6.04
|
$
|
—
|
|
Exercisable at end of period
|
3,390
|
|
$
|
12.03
|
|
5.12
|
$
|
—
|
|
The aggregate intrinsic value included in the table above represents the total pretax intrinsic value that would have been received by the option holders had all option holders exercised their options on
December 31, 2018
. The intrinsic value is calculated as the total number of option shares multiplied by the difference between the closing price of our common stock on the last trading day of the period and the exercise price of the options. This amount changes based on the price of our common stock.
The weighted-average fair value of the stock options granted in the year ended December 31, 2016 was
$4.03
.
As of December 31, 2017, the total intrinsic value of stock options exercised was not significant, and was
$0.7 million
as of
December 31, 2016
. The actual tax benefits realized related to the stock options exercised for the year ended December 31,
2017
were not significant and were
$0.3 million
for the year ended
December 31, 2016
.
Restricted stock units
Nonvested restricted stock units activity for the year ending
December 31, 2018
was as follows:
|
|
|
|
|
|
|
(share data in thousands)
|
Number of Shares
|
Weighted-Average Grant Date Fair Value
|
Nonvested at beginning of period
|
2,227
|
|
$
|
7.63
|
|
Granted
|
216
|
|
5.76
|
|
Vested
|
(665
|
)
|
12.42
|
|
Cancelled/forfeited
|
(1,528
|
)
|
5.45
|
|
Rights offering equitable adjustment
|
683
|
|
—
|
|
Nonvested at end of period
|
933
|
|
$
|
5.33
|
|
The actual tax benefits realized related to the restricted stock units vested during the year ended December 31, 2018, 2017 and 2016 were
$0.6 million
,
$1.1 million
and
$2.7 million
, respectively.
Performance-based restricted stock units
During 2017 and 2016, we granted certain employees performance-based restricted stock units ("PSUs") under the BW Plan, which include both performance and service conditions. PSU awards vest upon satisfying certain service requirements and financial metrics, including return on invested capital ("ROIC"), cumulative earnings per share ("EPS") and total shareholder return ("TSR"), established by the board of directors. The fair value of the TSR portion of each PSU granted was estimated at the date of grant using a Monte Carlo methodology based on market prices and the following weighted-average assumptions:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
2016
|
Risk-free interest rate
|
1.54
|
%
|
0.96
|
%
|
Expected volatility
|
42
|
%
|
25
|
%
|
Expected life of the option in years
|
2.83
|
|
2.83
|
|
Expected dividend yield
|
—
|
%
|
—
|
%
|
PSU activity for the year ending
December 31, 2018
was as follows:
|
|
|
|
|
|
|
(share data in thousands)
|
Number of Shares
|
Weighted-Average Grant Date Fair Value
|
Nonvested at beginning of period
|
1,135
|
|
$
|
12.75
|
|
Granted
|
—
|
|
—
|
|
Vested
|
—
|
|
—
|
|
Cancelled/forfeited
|
(618
|
)
|
9.36
|
|
Rights offering equitable adjustment
|
402
|
|
—
|
|
Nonvested at end of period
|
919
|
|
$
|
9.74
|
|
Performance-based, cash settled units
In 2017, we granted certain employees cash-settled performance units under the BW Plan, the value of which is tied to the fair market value of our common stock on the vesting dates, subject to a ceiling of
150%
of the grant date share value. The activity for the cash-settled performance units for the year ending
December 31, 2018
was as follows:
|
|
|
|
|
|
|
(share data in thousands)
|
Number of Shares
|
Weighted-Average Grant Date Fair Value
|
Nonvested at beginning of period
|
1,799
|
|
$
|
4.53
|
|
Granted
|
—
|
|
—
|
|
Vested
|
(707
|
)
|
3.16
|
|
Cancelled/forfeited
|
(357
|
)
|
2.21
|
|
Rights offering equitable adjustment
|
9
|
|
—
|
|
Nonvested at end of period
|
744
|
|
$
|
4.73
|
|
Stock Appreciation Rights
In December 2018, we granted stock appreciation rights to certain employees ("Employee SARs") and to a non-employee related party, BRPI Executive Consulting, LLC, ("Non-employee SARs"). The Employee SARs and Non-employee SARs both expire
ten
years after the grant date and primarily vest
100%
upon completion after the required years of service. Upon vesting, the Employee SARs and Non-employee SARs may be exercised within
ten
business days following the end of any calendar quarter during which the volume weighted average share price is greater than the share price goal. Upon exercise of the SARs, holders receive a cash-settled payment equal to the number of SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the SARs base price. Employee SARs are issued under the BW Plan, and Non-employee SARs are issued under a Non-employee SARs agreement. The liability method is used to
recognize the accrued compensation expense with cumulatively adjusted revaluations to the then current fair value at each reporting date through final settlement.
We used the following assumptions to determine the fair value of the SARs granted to employees and non-employee in 2018:
|
|
|
|
|
Year Ended December 31, 2018
|
Risk-free interest rate
|
2.80
|
%
|
Expected volatility
|
46
|
%
|
Expected life in years
|
9.50
|
|
Suboptimal exercise factor
|
2.0x
|
|
In making these assumptions, we based estimated volatility on the historical returns of the Company's stock price and selected guideline companies. We based risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. We relied upon a suboptimal exercise factor, representing the ratio of the base price to the stock price at the time of exercise, to account for potential early exercise prior to the expiration of the contractual term. With consideration to the executive level of the SARs holders, a suboptimal exercise multiple of
2.0
x was selected. Subject to vesting conditions, should the stock price achieve a value of
2.0
x above the base price, we assume the holders will exercise prior to the expiration of the contractual term of the SARs. The expected term for the SARs is an output of our valuation model in estimating the time period that the SARs are expected to remain unexercised. Our valuation model assumes the holders will exercise their SARs prior to the expiration of the contractual term of the SARs.
The following table presents the changes in our outstanding Employee SARs and Non-employee SARs for the year ending December 31, 2018 and the associated weighted average values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of Employee SARs
|
Number of Non-Employee SARs
|
Total Number of SARs
|
Weighted-Average Value
|
Weighted Average Exercise Price
|
Nonvested at beginning of period
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Granted
|
2,531
|
|
8,435
|
|
10,966
|
|
0.18
|
|
2.34
|
|
Vested
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Nonvested at end of period
|
2,531
|
|
8,435
|
|
10,966
|
|
$
|
0.18
|
|
$
|
2.34
|
|
As of December 31, 2018, the total intrinsic value of the SARs was
$2.3 million
.
NOTE 10
– PROVISION FOR INCOME TAXES
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the U.S. federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between
19%
and approximately
30%
. We provide for income taxes based on the tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary significantly from period to period due to these variations, changes in jurisdictional mix of our income and valuation allowances in certain jurisdictions that can offset income tax expense or benefit.
We are currently under audit by various domestic and international authorities. With few exceptions, we do not have any returns under examination for years prior to 2014. The United States Internal Revenue Service has completed examinations of the federal tax returns of our former parent, BWXT, through 2014, and all matters arising from such examinations have been resolved.
We recognize the effect of income tax positions only if it is more-likely-than-not that those positions will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Unrecognized tax
benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Balance at beginning of period
|
$
|
1,204
|
|
$
|
884
|
|
$
|
1,141
|
|
Increases based on tax positions taken in the current year
|
588
|
|
277
|
|
178
|
|
Increases based on tax positions taken in the prior years
|
51
|
|
56
|
|
230
|
|
Decreases based on tax positions taken in the prior years
|
—
|
|
(13
|
)
|
—
|
|
Decreases due to settlements with tax authorities
|
(140
|
)
|
—
|
|
(665
|
)
|
Decreases due to lapse of applicable statute of limitation
|
(203
|
)
|
—
|
|
—
|
|
Balance at end of period
|
$
|
1,500
|
|
$
|
1,204
|
|
$
|
884
|
|
Subject to the impact of valuation allowances discussed more fully below, the
$1.5 million
balance of unrecognized tax benefits at December 31, 2018 would decrease expense if recognized. We do not expect any of our unrecognized income tax benefits to be resolved in the next twelve months. We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes; however, such amounts are not significant to any period presented.
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
Deferred tax assets:
|
|
|
Pension liability
|
$
|
66,652
|
|
$
|
58,810
|
|
Accrued warranty expense
|
2,943
|
|
5,262
|
|
Accrued vacation pay
|
98
|
|
996
|
|
Accrued liabilities for self-insurance (including postretirement health care benefits)
|
4,653
|
|
3,910
|
|
Accrued liabilities for executive and employee incentive compensation
|
4,473
|
|
4,950
|
|
Investments in joint ventures and affiliated companies
|
—
|
|
10,422
|
|
Long-term contracts
|
27,623
|
|
6,801
|
|
Accrued Legal Fees
|
1,058
|
|
1,579
|
|
Inventory Reserve
|
1,595
|
|
1,842
|
|
Property, plant and equipment
|
1,200
|
|
—
|
|
Net operating loss carryforward
|
143,401
|
|
95,715
|
|
State tax net operating loss carryforward
|
21,017
|
|
21,658
|
|
Capital loss carryforward
|
3,744
|
|
—
|
|
Interest disallowance carryforward
|
21,550
|
|
—
|
|
Foreign tax credit carryforward
|
2,535
|
|
7,150
|
|
Other tax credits
|
6,642
|
|
5,678
|
|
Other
|
10,755
|
|
4,980
|
|
Total deferred tax assets
|
319,939
|
|
229,753
|
|
Valuation allowance for deferred tax assets
|
(313,094
|
)
|
(108,105
|
)
|
Net, total deferred tax assets
|
6,845
|
|
121,648
|
|
|
|
|
Deferred tax liabilities:
|
|
|
Investments in joint ventures and affiliated companies
|
30
|
|
—
|
|
Long-term contracts
|
—
|
|
569
|
|
Intangibles
|
9,595
|
|
21,215
|
|
Property, plant and equipment
|
—
|
|
2,835
|
|
Undistributed foreign earnings
|
—
|
|
1,314
|
|
Other
|
—
|
|
2,445
|
|
Total deferred tax liabilities
|
9,625
|
|
28,378
|
|
Net deferred tax (liabilities) assets
|
$
|
(2,780
|
)
|
$
|
93,270
|
|
At December 31, 2018, we had a valuation allowance of
$313.1 million
for deferred tax assets, which we expect may not be realized through carrybacks, future reversals of existing taxable temporary differences and estimates of future taxable income. In the three months ended September 30, 2018, we recognized income tax expense of
$94.3 million
, which included
$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 19
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. In reporting periods prior to the third quarter of 2018, our plans to
mitigate the liquidity challenges created by losses in the Vølund & Other Renewable segment primarily focused on the non-core asset sales and financing activities described in
Note 1
, but in October 2018, our plans to mitigate our liquidity challenges primarily depended upon realizing projected cost savings from our previously announced restructuring actions and achievement of our forecasted cash generation from our core operations. These third quarter 2018 changes in circumstances were reflected in the weight assigned to each piece of evidence considered and resulted in the judgment that a full valuation allowance against our remaining net deferred tax assets should be recorded at September 30, 2018, when we assigned more weight to our liquidity challenges. We continue to have a full valuation allowance against our remaining net deferred tax assets as of December 31, 2018, as our assessment and conclusions remain unchanged from September 30, 2018. We will continue to weigh and assess the positive and negative evidence that exists as of each measurement date and the valuation allowances may be reversed in the future if sufficient positive evidence exists to outweigh the negative evidence. Any reversal of our valuation allowance could be material to the income or loss for the period in which our assessment changes. Valuation allowances do not limit our ability to use deferred tax assets in the future.
The following is an analysis of our valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Beginning
balance
|
Charges to costs
and expenses
|
Charged to
other accounts
|
Ending
balance
|
Year Ended December 31, 2018
|
$
|
(108,105
|
)
|
$
|
(204,727
|
)
|
$
|
(262
|
)
|
$
|
(313,094
|
)
|
Year Ended December 31, 2017
|
(40,484
|
)
|
(61,021
|
)
|
(6,600
|
)
|
(108,105
|
)
|
Year Ended December 31, 2016
|
(10,077
|
)
|
(29,307
|
)
|
(1,100
|
)
|
(40,484
|
)
|
Loss before the provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
United States
|
$
|
(166,269
|
)
|
$
|
(46,673
|
)
|
$
|
(10,208
|
)
|
Other than the United States
|
(389,532
|
)
|
(270,877
|
)
|
(109,419
|
)
|
Loss before provision for income taxes
|
$
|
(555,801
|
)
|
$
|
(317,550
|
)
|
$
|
(119,627
|
)
|
The provision for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Current:
|
|
|
|
United States – federal
|
$
|
1,817
|
|
$
|
(239
|
)
|
$
|
284
|
|
United States – state and local
|
(276
|
)
|
397
|
|
(415
|
)
|
Other than in the United States
|
3,339
|
|
8,215
|
|
4,504
|
|
Total current
|
4,880
|
|
8,373
|
|
4,373
|
|
Deferred:
|
|
|
|
United States – Federal
|
84,203
|
|
57,475
|
|
7,287
|
|
United States – state and local
|
10,020
|
|
2,903
|
|
6,353
|
|
Other than in the United States
|
3,121
|
|
(5,042
|
)
|
(15,307
|
)
|
Total deferred (benefit) provision
|
97,344
|
|
55,336
|
|
(1,667
|
)
|
Provision for income taxes
|
$
|
102,224
|
|
$
|
63,709
|
|
$
|
2,706
|
|
The following is a reconciliation of the United States statutory federal tax rate (21%) to the consolidated effective tax rate:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
2017
|
2016
|
United States federal statutory rate
|
21.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State and local income taxes
|
0.5
|
|
0.3
|
|
(3.1
|
)
|
Foreign rate differential
|
1.3
|
|
(9.5
|
)
|
(11.8
|
)
|
Deferred Taxes - Change in Tax Rate
|
0.4
|
|
(19.6
|
)
|
—
|
|
Tax credits
|
(0.7
|
)
|
0.9
|
|
2.7
|
|
Dividends and deemed dividends from affiliates
|
—
|
|
(1.8
|
)
|
(0.2
|
)
|
Valuation allowances
|
(36.8
|
)
|
(17.7
|
)
|
(25.3
|
)
|
Goodwill impairment
|
(1.4
|
)
|
(6.9
|
)
|
—
|
|
Uncertain tax positions
|
—
|
|
—
|
|
0.3
|
|
Non-deductible expenses
|
(0.6
|
)
|
0.2
|
|
(1.6
|
)
|
Other
|
(2.1
|
)
|
(1.0
|
)
|
1.7
|
|
Effective tax rate
|
(18.4
|
)%
|
(20.1
|
)%
|
(2.3
|
)%
|
We have tax effected foreign net operating loss carryforwards ("NOLs") of
$122.9 million
available to offset future taxable income in certain foreign jurisdictions. Of these foreign NOLs,
$117.8 million
do not expire and will be available indefinitely. The remaining foreign NOLs begin to expire in 2020.
At December 31, 2018, we have a tax effected United States federal net operating loss of
$20.5 million
.
$17.8 million
of the United States federal net operating loss will begin to expire in 2031 and the balance has an unlimited life. At December 31, 2018, we have foreign tax credit carryovers of
$2.5 million
. At December 31, 2018, we have tax effected state net operating loss benefits of
$21.0 million
available to offset future taxable income in various states. Our state net operating loss carryforwards begin to expire in the year 2019.
All deferred tax assets, including NOLs, have also been fully offset by valuation allowances as of September 30, 2018.
It has been our practice to reinvest indefinitely, the earnings of our foreign subsidiaries and that position has not changed as a result of the enactment of the U.S. Tax Cuts and Jobs Act. If we were to distribute earnings from certain foreign subsidiaries, we would be subject to withholding taxes of approximately
$2.3 million
but U.S. income taxes would generally not be imposed upon such distributions. We have not established deferred taxes for these withholding taxes.
As a result of accumulations of the Company's common stock among several large shareholders and the impact of the 2018 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. However, a relatively small increase in ownership by any of our shareholders owning at least 5% of the Company could result in an ownership change. To illustrate, if we had experienced an ownership change as of December 31, 2018, the future utilization of our federal NOLs would become limited to approximately
$1.7 million
annually (
$0.4 million
tax effected). The actual determination of the annual Section 382 limitation would be dependent upon the value of the Company multiplied by the long-term tax-exempt rate at the time the ownership change occurred.
New Tax Act
The United States Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to the United States income tax law. Beginning in 2018, the Tax Act reduced the United States statutory corporate income tax rate from 35% to 21% and created a modified territorial system that will generally allow United States companies a full dividend received deduction for any future dividends from non-U.S. subsidiaries. In addition to the tax rate reduction and changes to the territorial nature of the US tax system, the Tax Act introduced a new limitation on interest deductions, a Foreign Derived Intangible Income (“FDII”) and new minimum tax on foreign sourced income, Global Low Taxed Intangible
Income (“GILTI”). The Company will account for GILTI as a period cost in the year the tax is incurred. In 2018, we did not report any FDII benefit or GILTI taxes but did incur an interest limitation of approximately
$94.8 million
. This disallowed interest expense will be available for carryforward and is not subject to expiration but can only be used in a future year when the net interest expense for that period (including carryforward amounts) exceeds the relevant annual limitation.
In connection with the transition to a modified territorial system, the Tax Act also established a mandatory one-time deemed repatriation transition tax on deferred foreign earnings.
The SEC staff issued Staff Accounting Bulletin ("SAB 118"), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 ("ASC 740"). In accordance with SAB 118, we made reasonable estimates of the effects of the Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We completed our accounting related to these items as described in SAB 118, with no changes to the provisional amounts recorded in 2017. The 2018 effective tax rate reconciliation reflects the corporate rate reductions enacted by the Tax Act.
Deferred tax effects
At December 31, 2017, we remeasured our deferred taxes and recorded a deferred tax expense of
$62.4 million
. The fourth quarter 2017 amount consisted of an expense for the corporate rate reduction of
$54.4 million
, expense of
$0.8 million
based on a change in our deferred taxes related to executive compensation and an expense of
$7.2 million
to record a valuation allowance on foreign tax credit carryforwards.
One-time transition tax
The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we determined, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-United States income taxes paid on such earnings. Because we had estimated an E&P deficit, we did not record a Transition Tax at December 31, 2017 and as stated above, we completed our analysis and did not revise that estimate as of December 31, 2018.
NOTE 11
– COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the years ended December 31, 2018, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
Net unrealized gain (loss) on investments (net of tax)
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
Balance at December 31, 2015
|
$
|
(19,493
|
)
|
$
|
(44
|
)
|
$
|
1,786
|
|
$
|
(1,102
|
)
|
$
|
(18,853
|
)
|
Other comprehensive income (loss) before reclassifications
|
(24,494
|
)
|
7
|
|
2,046
|
|
7,692
|
|
(14,749
|
)
|
Reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
(3,030
|
)
|
150
|
|
(2,880
|
)
|
Net other comprehensive income (loss)
|
(24,494
|
)
|
7
|
|
(984
|
)
|
7,842
|
|
(17,629
|
)
|
Balance at December 31, 2016
|
$
|
(43,987
|
)
|
$
|
(37
|
)
|
$
|
802
|
|
$
|
6,740
|
|
$
|
(36,482
|
)
|
Other comprehensive income (loss) before reclassifications
|
16,150
|
|
99
|
|
3,204
|
|
(152
|
)
|
19,301
|
|
Reclassified from AOCI to net income (loss)
|
—
|
|
(24
|
)
|
(2,269
|
)
|
(2,955
|
)
|
(5,248
|
)
|
Net other comprehensive income (loss)
|
16,150
|
|
75
|
|
935
|
|
(3,107
|
)
|
14,053
|
|
Balance at December 31, 2017
|
$
|
(27,837
|
)
|
$
|
38
|
|
$
|
1,737
|
|
$
|
3,633
|
|
$
|
(22,429
|
)
|
ASU 2016-1 cumulative adjustment
(1)
|
—
|
|
(38
|
)
|
—
|
|
—
|
|
(38
|
)
|
Other comprehensive income (loss) before reclassifications
|
16,452
|
|
—
|
|
890
|
|
(22
|
)
|
17,320
|
|
Reclassified from AOCI to net income (loss)
|
551
|
|
—
|
|
(1,265
|
)
|
(2,740
|
)
|
(3,454
|
)
|
Amounts reclassified from AOCI to pension and other accumulated postretirement benefit liabilities and deferred income taxes
(2)
|
—
|
|
—
|
|
—
|
|
(2,831
|
)
|
(2,831
|
)
|
Net other comprehensive income (loss)
|
17,003
|
|
(38
|
)
|
(375
|
)
|
(5,593
|
)
|
10,997
|
|
Balance at December 31, 2018
|
$
|
(10,834
|
)
|
$
|
—
|
|
$
|
1,362
|
|
$
|
(1,960
|
)
|
$
|
(11,432
|
)
|
(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 18
.
The amounts reclassified out of AOCI by component and the affected Consolidated Statements of Operations line items are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
AOCI component
|
Line items in the Consolidated Statements of Operations affected by reclassifications from AOCI
|
Year Ended December 31,
|
2018
|
2017
|
2016
|
Release of currency translation gain with the sale of equity method investment
|
Equity in income and impairment of investees
|
$
|
(551
|
)
|
$
|
—
|
|
$
|
—
|
|
|
Provision for income taxes
|
|
|
—
|
|
—
|
|
|
Net loss
|
$
|
(551
|
)
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Derivative financial instruments
|
Revenues
|
$
|
1,638
|
|
$
|
10,059
|
|
$
|
4,624
|
|
|
Cost of operations
|
(15
|
)
|
(118
|
)
|
195
|
|
|
Other-net
|
—
|
|
(7,438
|
)
|
(1,221
|
)
|
|
Total before tax
|
1,623
|
|
2,503
|
|
3,598
|
|
|
Provision (benefit) for income taxes
|
358
|
|
234
|
|
568
|
|
|
Net income
|
$
|
1,265
|
|
$
|
2,269
|
|
$
|
3,030
|
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
3,002
|
|
$
|
2,912
|
|
$
|
254
|
|
|
Provision (benefit) for income taxes
|
262
|
|
(43
|
)
|
404
|
|
|
Net income (loss)
|
$
|
2,740
|
|
$
|
2,955
|
|
$
|
(150
|
)
|
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
—
|
|
$
|
38
|
|
$
|
—
|
|
|
Provision for income taxes
|
—
|
|
14
|
|
—
|
|
|
Net income
|
$
|
—
|
|
$
|
24
|
|
$
|
—
|
|
NOTE 12
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
Raw materials and supplies
|
$
|
44,833
|
|
$
|
54,291
|
|
Work in progress
|
5,348
|
|
6,918
|
|
Finished goods
|
11,142
|
|
11,708
|
|
Total inventories
|
$
|
61,323
|
|
$
|
72,917
|
|
NOTE 13
– EQUITY METHOD INVESTMENTS
As of December 31, 2018, we do not have any remaining investments in equity method investees. 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
, which was classified in equity income of investees in the Consolidated Statement of Operations. 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 designed, manufactured, produced and sold 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 consolidated statement of operations. TBWES had a manufacturing facility that produced 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. These other-than-temporary-impairment losses were classified in equity income of investees in the Consolidated Statements of Operations.
On December 22, 2016, we sold all of our interest in our former Australian joint venture, Halley & Mellowes Pty. Ltd. ("HMA") for
$18.0 million
. The sale of HMA resulted in an
$8.3 million
gain, which was classified in equity income of investees in the Consolidated Statement of Operations.
The undistributed earnings of our equity method investees were
$7.9 million
and
$59.6 million
at December 31, 2017 and 2016, respectively. Summarized below is consolidated balance sheet and statement of operations information for investments accounted for under the equity method:
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2017
|
Current assets
|
$
|
322,956
|
|
Noncurrent assets
|
137,081
|
|
Total assets
|
$
|
460,037
|
|
Current liabilities
|
$
|
342,178
|
|
Noncurrent liabilities
|
24,474
|
|
Owners' equity
|
93,385
|
|
Total liabilities and equity
|
$
|
460,037
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2017
|
2016
|
Revenues
|
$
|
346,459
|
|
$
|
488,101
|
|
Gross profit
|
32,682
|
|
76,986
|
|
|
|
|
(Loss) income before provision for income taxes
|
(10,626
|
)
|
19,529
|
|
Provision for income taxes
|
1,907
|
|
3,715
|
|
Net (loss) income
|
$
|
(12,533
|
)
|
$
|
15,814
|
|
The provision for income taxes is based on the tax laws and rates in the countries in which our investees operate. The taxation regimes vary not only by their nominal rates, but also by allowable deductions, credits and other benefits. For some of our United States investees, United States income taxes are the responsibility of the respective owners, which is primarily the reason for the provision for income taxes being low in relation to income before provision for income taxes.
Reconciliation of net income in the statement of operations of our investees to equity in income of investees in our Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Equity income based on stated ownership percentages
|
$
|
250
|
|
$
|
7,530
|
|
$
|
7,898
|
|
TBWES other-than-temporary impairment
|
(18,362
|
)
|
(18,193
|
)
|
—
|
|
Gain on sale of our interest in BWBC
|
6,509
|
|
—
|
|
—
|
|
Gain on sale of our interest in HMA
|
—
|
|
—
|
|
8,324
|
|
All other adjustments due to amortization of basis differences,
timing of GAAP adjustments and other adjustments
|
—
|
|
796
|
|
218
|
|
Equity in income (loss) of investees
|
$
|
(11,603
|
)
|
$
|
(9,867
|
)
|
$
|
16,440
|
|
Our transactions with unconsolidated affiliates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Sales to
|
$
|
—
|
|
$
|
7,143
|
|
$
|
17,220
|
|
Purchases from
|
—
|
|
12,470
|
|
32,490
|
|
Dividends received
(1)
|
890
|
|
50,134
|
|
12,160
|
|
Capital contributions
(2)
|
—
|
|
—
|
|
26,256
|
|
(1)
includes
$48.1 million
,
$6.0 million
in dividends received from BWBC in 2017 and 2016, respectively, before taxes.
(2)
includes a
$26.3 million
contribution we made in April 2016 to increase our ownership interest in TBWES for the purpose of extinguishing the joint venture's high-interest third-party debt and avoiding the associated future interest cost (our joint venture partner contributed the same amount to TBWES).
Our accounts receivable-other includes receivables from these unconsolidated affiliates of
$5.8 million
at December 31, 2017.
NOTE 14
- GOODWILL
The following summarizes the changes in the carrying amount of goodwill as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Babcock & Wilcox
|
Vølund & Other Renewable
|
SPIG
|
Total
|
Balance at December 31, 2016
(1) (2)
|
$
|
46,220
|
|
$
|
48,435
|
|
$
|
68,432
|
|
$
|
163,087
|
|
Currency translation adjustments
|
1,150
|
|
1,530
|
|
6,814
|
|
9,494
|
|
2017 impairment charges
|
—
|
|
(49,965
|
)
|
(36,938
|
)
|
(86,903
|
)
|
Balance at December 31, 2017
(1) (2)
|
$
|
47,370
|
|
$
|
—
|
|
$
|
38,308
|
|
$
|
85,678
|
|
Currency translation adjustments
|
(262
|
)
|
—
|
|
(768
|
)
|
(1,030
|
)
|
2018 impairment charges
|
—
|
|
—
|
|
(37,540
|
)
|
(37,540
|
)
|
Balance at December 31, 2018
(2)
|
$
|
47,108
|
|
$
|
—
|
|
$
|
—
|
|
$
|
47,108
|
|
(1)
Goodwill for MEGTEC and Universal are included in noncurrent assets of discontinued operations. See
Note 4
.
(2)
Accumulated goodwill impairments were
$50.0 million
for the Vølund & Other Renewable segment as of December 31, 2017 and
$74.4 million
and
$36.9
million for the SPIG segment as of December 31, 2018 and December 31, 2017, respectively. Prior to December 31, 2016, 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.
During the third quarter of 2018, we established a full valuation allowance on the majority of its U.S. deferred tax assets. Substantially all of those U.S. deferred tax assets related to the Babcock & Wilcox reporting unit such that the establishment of the valuation allowance reduced the carrying value of the Babcock & Wilcox reporting unit to a negative amount. Within the Babcock & Wilcox segment,
$38.3 million
of goodwill was allocated to the Babcock & Wilcox reporting unit that had a negative carrying value as of September 30, 2018. An analysis was performed as of September 30, 2018 noting no indicators of impairment for this reporting unit.
During the annual impairment analysis as of October 1, 2018, which was performed in a manner consistent with the methodology described above, the fair value of the Babcock & Wilcox and Construction reporting units exceeded their carrying value and
no
impairment of goodwill was recognized. The discount rates used in this analysis were
14.5%
and
14.0%
for the Babcock & Wilcox and Construction reporting units, respectively, which were the only reporting units with goodwill balances remaining as of the analysis date. Reasonable changes in assumptions for our Babcock & Wilcox and Construction reporting units also would not indicate impairment because of the positive fair value of the Babcock & Wilcox reporting unit compared with its negative carrying value and the
118%
headroom indicated by the test for the Construction reporting unit.
Interim impairment testing as of December 31, 2018 was performed for all reporting units due to significant decrease in the Company's market capitalization during the quarter. This analysis was performed in a manner consistent with the methodology described above and the results demonstrated that the fair value of the Babcock & Wilcox and Construction reporting units exceeded their carrying value and
no
impairment of goodwill was recognized. The discount rates used in this analysis were
12.5%
and
13.0%
for the Babcock & Wilcox and Construction reporting units, respectively, which were the only reporting units with goodwill balances remaining as of the analysis date. Reasonable changes in assumptions for our Babcock & Wilcox and Construction reporting unit also would not indicate impairment because of the positive fair value of the Babcock & Wilcox reporting unit compared with its negative carrying value and the
98%
headroom indicated by the test for the Construction reporting unit.
In the third quarter of 2017, we completed an interim impairment test that was performed in a manner consistent with the methodology described above and recorded
$50.0 million
of impairment charges in the Vølund & Other Renewable reporting unit due to significant charges incurred that attributed to a significant decline in our market capitalization in the third quarter of 2017. Also, as a result of our analysis in the third quarter of 2017, our SPIG reporting unit 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 15
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
Definite-lived intangible assets
(1)
|
|
|
Customer relationships
|
$
|
24,764
|
|
$
|
25,494
|
|
Unpatented technology
|
15,098
|
|
12,910
|
|
Patented technology
|
2,616
|
|
6,542
|
|
Tradename
|
12,566
|
|
13,951
|
|
Backlog
|
17,760
|
|
18,060
|
|
All other
|
9,728
|
|
7,611
|
|
Gross value of definite-lived intangible assets
|
82,532
|
|
84,568
|
|
Customer relationships amortization
|
(17,219
|
)
|
(12,455
|
)
|
Unpatented technology amortization
|
(3,760
|
)
|
(2,184
|
)
|
Patented technology amortization
|
(2,348
|
)
|
(2,213
|
)
|
Tradename amortization
|
(3,672
|
)
|
(3,042
|
)
|
Acquired backlog amortization
|
(17,760
|
)
|
(16,622
|
)
|
All other amortization
|
(8,285
|
)
|
(7,292
|
)
|
Accumulated amortization
|
(53,044
|
)
|
(43,808
|
)
|
Net definite-lived intangible assets
|
$
|
29,488
|
|
$
|
40,760
|
|
Indefinite-lived intangible assets
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
Total intangible assets, net
|
$
|
30,793
|
|
$
|
42,065
|
|
(1)
Intangible assets for MEGTEC and Universal are included in noncurrent assets of discontinued operations. See
Note 4
.
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Balance at beginning of period
|
$
|
42,065
|
|
$
|
48,622
|
|
$
|
11,293
|
|
Business acquisitions & adjustments
|
—
|
|
—
|
|
55,438
|
|
Amortization expense
|
(6,715
|
)
|
(11,049
|
)
|
(15,789
|
)
|
Impairment expense
|
(2,521
|
)
|
—
|
|
—
|
|
Currency translation adjustments and other
|
(2,036
|
)
|
4,492
|
|
(2,320
|
)
|
Balance at end of the period
|
$
|
30,793
|
|
$
|
42,065
|
|
$
|
48,622
|
|
Amortization of intangible assets is included in cost of operations and SG&A in our Consolidated Statement of Operations, but it is not allocated to segment results.
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, as well as our annual test as of October 1, 2018, 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.
In the fourth quarter of 2018, a strategic decision was made to exit certain geographies of the SPIG segment, and as a result,
$2.5 million
of the customer relationship and other intangible assets related to these geographies were impaired.
As of December 31, 2018, and December 31, 2017, the SPIG reporting unit had
$25.0 million
and
$32.7 million
of identifiable intangible assets, net of accumulated amortization, respectively.
As of December 31, 2018, the Vølund asset group unit had
$2.0 million
of identifiable intangible assets, net of accumulated amortization. In our annual impairment test as of October 1, 2018 and interim test as of December 31, 2018, the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of the Vølund asset group and no impairment was indicated.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
|
|
|
Year ending
|
Amortization expense
|
December 31, 2019
|
4,226
|
|
December 31, 2020
|
3,523
|
|
December 31, 2021
|
3,303
|
|
December 31, 2022
|
3,225
|
|
December 31, 2023
|
3,216
|
|
Thereafter
|
11,995
|
|
NOTE 16
– PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment less accumulated depreciation is as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
Land
|
$
|
3,575
|
|
$
|
3,631
|
|
Buildings
|
106,238
|
|
107,944
|
|
Machinery and equipment
|
181,825
|
|
205,331
|
|
Property under construction
|
2,290
|
|
5,979
|
|
|
293,928
|
|
322,885
|
|
Less accumulated depreciation
|
203,036
|
|
208,178
|
|
Net property, plant and equipment
|
$
|
90,892
|
|
$
|
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 approximately the third quarter of 2019. 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
$2.9 million
was recognized in the year ended December 31, 2018.
NOTE 17
– 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:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Balance at beginning of period
|
$
|
33,514
|
|
$
|
36,520
|
|
$
|
35,819
|
|
Additions
|
33,095
|
|
22,373
|
|
22,117
|
|
Expirations and other changes
|
(5,963
|
)
|
(13,805
|
)
|
(10,531
|
)
|
Increases attributable to business combinations
|
—
|
|
—
|
|
918
|
|
Payments
|
(14,151
|
)
|
(13,622
|
)
|
(11,089
|
)
|
Translation and other
|
(1,378
|
)
|
2,048
|
|
(714
|
)
|
Balance at end of period
|
$
|
45,117
|
|
$
|
33,514
|
|
$
|
36,520
|
|
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 year ended December 31, 2018 includes a
$14.2 million
increase in expected warranty costs for the six European Vølund loss contracts based on experience from the startup and commissioning activities in the second quarter of 2018. The Babcock & Wilcox segment recorded additions to the warranty accrual to include specific provisions on industrial steam contracts totaling
$4.3 million
,
$7.9 million
and
$2.1 million
during the years ended December 31, 2018, 2017 and 2016, respectively. During the years ended December 31, 2018, 2017 and 2016, our Babcock & Wilcox segment reduced its accrued warranty expense by
$4.5 million
,
$9.1 million
and
$4.4 million
, respectively, to reflect the expiration of warranties and updated its estimated warranty accrual rate to reflect its warranty claims experience and contractual warranty obligations.
NOTE 18
– PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
We have historically provided defined benefit retirement benefits to domestic employees under the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "U.S. Plan"), a noncontributory plan. As of 2006, the U.S. Plan was closed to new salaried plan entrants. Effective December 31, 2015, benefit accruals for those salaried employees covered by, and continuing to accrue service and salary adjusted benefits under the U.S. Plan ceased. As of December 31, 2018, and 2017, only approximately
100
hourly union employees continue to accrue benefits under the U.S. Plan.
Effective January 1, 2012, a defined contribution component was adopted applicable to Babcock & Wilcox Canada, Ltd. (the "Canadian Plans"). Any employee with less than two years of continuous service as of December 31, 2011 was required to enroll in the defined contribution component of the Canadian Plans as of January 1, 2012 or upon the completion of 6 months of continuous service, whichever is later. These and future employees will not be eligible to enroll in the defined benefit component of the Canadian Plans. In 2014, benefit accruals under certain hourly Canadian pension plans were ceased with an effective date of January 1, 2015. As part of the spin-off transaction, we split the Canadian defined benefit plans from BWXT, which was completed in 2017. We did not present these plans as multi-employer plans because our portion was separately identifiable, and we were able to assess the assets, liabilities and periodic expense in the same manner as if it were a separate plan in each period.
We also sponsor the Diamond Power Specialty Limited Retirement Benefits Plan (the "U.K. Plan") through our subsidiary. Benefit accruals under this plan ceased effective November 30, 2015. We have accounted for the GMP equalization following the U.K. High Court ruling during the fourth quarter of 2018 by recording prior service cost in accumulated other comprehensive income that will be amortized through net periodic pension cost over
15 years
.
We do not provide retirement benefits to certain non-resident alien employees of foreign subsidiaries. Retirement benefits for salaried employees who accrue benefits in a defined benefit plan are based on final average compensation and years of service, while benefits for hourly paid employees are based on a flat benefit rate and years of service. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended, or other applicable law. Funding provisions under the Pension Protection Act accelerate funding requirements to ensure full funding of benefits accrued.
We make available other benefits which include postretirement health care and life insurance benefits to certain salaried and union retirees based on their union contracts, and on a limited basis, to future retirees.
Obligations and funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Year Ended December 31,
|
|
Other Postretirement Benefits
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
1,248,529
|
|
$
|
1,206,320
|
|
|
$
|
11,029
|
|
$
|
11,907
|
|
Service cost
|
729
|
|
687
|
|
|
16
|
|
15
|
|
Interest cost
|
40,411
|
|
41,014
|
|
|
427
|
|
319
|
|
Plan participants’ contributions
|
—
|
|
—
|
|
|
210
|
|
219
|
|
Curtailments
|
3,517
|
|
—
|
|
|
—
|
|
—
|
|
Settlements
|
57
|
|
509
|
|
|
—
|
|
—
|
|
Amendments
|
743
|
|
—
|
|
|
5,248
|
|
—
|
|
Actuarial loss (gain)
|
(66,326
|
)
|
73,405
|
|
|
(1,296
|
)
|
(141
|
)
|
Loss (gain) due to transfer
|
(1,142
|
)
|
—
|
|
|
—
|
|
—
|
|
Foreign currency exchange rate changes
|
(4,689
|
)
|
5,475
|
|
|
(142
|
)
|
126
|
|
Benefits paid
|
(81,702
|
)
|
(78,881
|
)
|
|
(1,473
|
)
|
(1,416
|
)
|
Benefit obligation at end of period
|
$
|
1,140,127
|
|
$
|
1,248,529
|
|
|
$
|
14,019
|
|
$
|
11,029
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
1,007,002
|
|
$
|
922,868
|
|
|
$
|
—
|
|
$
|
—
|
|
Actual return on plan assets
|
(67,691
|
)
|
149,449
|
|
|
—
|
|
—
|
|
Employer contribution
|
20,059
|
|
17,234
|
|
|
1,263
|
|
1,197
|
|
Plan participants' contributions
|
—
|
|
—
|
|
|
210
|
|
219
|
|
Transfers
|
(1,121
|
)
|
—
|
|
|
—
|
|
—
|
|
Foreign currency exchange rate changes
|
(4,622
|
)
|
(3,668
|
)
|
|
—
|
|
—
|
|
Benefits paid
|
(81,702
|
)
|
(78,881
|
)
|
|
(1,473
|
)
|
(1,416
|
)
|
Fair value of plan assets at the end of period
|
871,925
|
|
1,007,002
|
|
|
—
|
|
—
|
|
Funded status
|
$
|
(268,202
|
)
|
$
|
(241,527
|
)
|
|
$
|
(14,019
|
)
|
$
|
(11,029
|
)
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
Accrued employee benefits
|
$
|
(1,165
|
)
|
$
|
(1,853
|
)
|
|
$
|
(1,985
|
)
|
$
|
(1,615
|
)
|
Accumulated postretirement benefit obligation
|
—
|
|
—
|
|
|
(12,034
|
)
|
(9,414
|
)
|
Pension liability
|
(269,613
|
)
|
(239,674
|
)
|
|
—
|
|
—
|
|
Prepaid pension
|
2,576
|
|
—
|
|
|
—
|
|
—
|
|
Accrued benefit liability, net
|
$
|
(268,202
|
)
|
$
|
(241,527
|
)
|
|
$
|
(14,019
|
)
|
$
|
(11,029
|
)
|
Amount recognized in accumulated comprehensive income (before taxes):
|
|
|
|
Prior service cost (credit)
|
$
|
943
|
|
$
|
324
|
|
|
$
|
(195
|
)
|
$
|
(7,792
|
)
|
Supplemental information:
|
|
|
|
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
|
|
|
Projected benefit obligation
|
$
|
1,083,965
|
|
$
|
1,248,529
|
|
|
$
|
—
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
1,083,965
|
|
$
|
1,266,902
|
|
|
$
|
14,019
|
|
$
|
11,029
|
|
Fair value of plan assets
|
$
|
813,187
|
|
$
|
1,007,002
|
|
|
$
|
—
|
|
$
|
—
|
|
Plans with plan assets in excess of accumulated benefit obligation
|
|
|
|
Projected benefit obligation
|
$
|
56,162
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
56,162
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
Fair value of plan assets
|
$
|
58,738
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
|
2018
|
2017
|
2016
|
Interest cost
|
$
|
40,411
|
|
$
|
41,014
|
|
$
|
40,784
|
|
|
$
|
427
|
|
$
|
319
|
|
$
|
897
|
|
Expected return on plan assets
|
(63,964
|
)
|
(59,409
|
)
|
(61,940
|
)
|
|
—
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
124
|
|
103
|
|
250
|
|
|
(2,349
|
)
|
(3,009
|
)
|
—
|
|
Recognized net actuarial loss (gain)
|
68,771
|
|
(8,201
|
)
|
31,982
|
|
|
(1,297
|
)
|
(505
|
)
|
(7,822
|
)
|
Benefit plans, net
|
45,342
|
|
(26,493
|
)
|
11,076
|
|
|
(3,219
|
)
|
(3,195
|
)
|
(6,925
|
)
|
Service cost included in COS
|
729
|
|
687
|
|
1,595
|
|
|
16
|
|
15
|
|
23
|
|
Net periodic benefit cost (benefit)
|
$
|
46,071
|
|
$
|
(25,806
|
)
|
$
|
12,671
|
|
|
$
|
(3,203
|
)
|
$
|
(3,180
|
)
|
$
|
(6,902
|
)
|
Recognized net actuarial loss (gain) consists primarily of our reported actuarial loss (gain), curtailments, settlements, and the difference between the actual return on plan assets and the expected return on plan assets. Total net MTM adjustments for our pension and other postretirement benefit plans were losses (gains) of
$67.5 million
,
$(8.7) million
and
$24.2 million
in the years ended, December 31, 2018, 2017 and 2016, respectively. We have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in
Note 6
as the MTM adjustment in the reconciliation of reportable segment income (loss) to consolidated operating losses. The recognized net actuarial loss (gain) was recorded in "Benefit plans, net" in our Consolidated Statements of Operations.
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 U.S. 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 U.S. 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 Consolidated Statements of Operations in the "Benefit plans, net" line item
.
During the three months ended June 30, 2018 and March 31, 2017, lump sum payments from our Canadian Plans resulted in a plan settlement gain of
$0.1 million
and a plan settlement loss of
$0.4 million
, respectively. Both settlements also triggered an interim MTM of the Canadian Plans assets and liabilities that was a gain of
$0.4 million
and a loss of
$0.7 million
in the three months ended June 30, 2018 and March 31, 2017, respectively. Both the settlement and the MTM gains/losses are reflected in the "Recognized net actuarial loss (gain)
" in the table above and are included in our Consolidated Statements of Operations in the "Benefit plans, net" line item.
We terminated the Babcock & Wilcox Retiree Medical Plan (the "Retiree Medical Plan") effective December 31, 2016. The Retiree Medical 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 Medical Plan, the participants had the option to enroll in a third-party health care exchange, to which the Company 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 Medical 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 Medical 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 Medical Plan filed a class action lawsuit against the Company in 2017 asserting that the change in health care coverage breached the Company's obligations under collective bargaining agreements. In April 2018, the court approved a settlement whereby the Company 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 Medical 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 Medical Plan.
Assumptions
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2018
|
2017
|
|
2018
|
2017
|
Weighted average assumptions used to determine net periodic benefit obligations:
|
|
|
|
|
|
Comparative single equivalent discount rate
|
4.26%
|
3.65%
|
|
4.02%
|
3.33%
|
Rate of compensation increase
|
0.07%
|
0.10%
|
|
—
|
—
|
Weighted average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
Comparative single equivalent discount rate
|
3.65%
|
4.11%
|
|
4.02%
|
3.33%
|
Expected return on plan assets
|
6.66%
|
6.64%
|
|
—%
|
—%
|
Rate of compensation increase
|
0.07%
|
0.10%
|
|
—%
|
—%
|
The expected rate of return on plan assets is based on the long-term expected returns for the investment mix of assets currently in the portfolio. In setting this rate, we use a building-block approach. Historic real return trends for the various asset classes in the plan's portfolio are combined with anticipated future market conditions to estimate the real rate of return for each asset class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each asset class. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the asset classes within the total asset portfolio. We use an expected return on plan assets assumption of
6.89%
for the majority of our pension plan assets (approximately
93%
of our total pension assets at December 31, 2018).
Investment goals
The overall investment strategy of the pension trusts is to achieve long-term growth of principal, while avoiding excessive risk and to minimize the probability of loss of principal over the long term. The specific investment goals that have been set for the pension trusts in the aggregate are (1) to ensure that plan liabilities are met when due and (2) to achieve an investment return on trust assets consistent with a reasonable level of risk.
Allocations to each asset class for both domestic and foreign plans are reviewed periodically and rebalanced, if appropriate, to assure the continued relevance of the goals, objectives and strategies. The pension trusts for both our domestic and foreign plans employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the plans' overall investment objectives. The goals of each investment manager are (1) to meet (in the case of passive accounts) or exceed (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark.
The investment performance of total portfolios, as well as asset class components, is periodically measured against commonly accepted benchmarks, including the individual investment manager benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.
Domestic plans:
We sponsor the U.S. Plan, which is a domestic defined benefit plan. The assets of this plan are held by the Trustee in The Babcock & Wilcox Company Master Trust (the "Master Trust"). For the years ended December 31, 2018 and 2017, the investment return on domestic plan assets of the Master Trust (net of deductions for management fees) was approximately
(7)%
and
17%
, respectively.
The following is a summary of the asset allocations for the Master Trust by asset category:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
2017
|
Asset Category:
|
|
|
Fixed Income (excluding United States Government Securities)
|
33
|
%
|
33
|
%
|
Commingled and Mutual Funds
|
41
|
%
|
41
|
%
|
United States Government Securities
|
25
|
%
|
21
|
%
|
Equity Securities
|
—
|
%
|
3
|
%
|
Derivatives
|
—
|
%
|
1
|
%
|
Other
|
1
|
%
|
1
|
%
|
The target asset allocation for the Master Trust is
55%
fixed income and
45%
equities. We routinely reassess the target asset allocation with a goal of better aligning the timing of expected cash flows from those assets to the anticipated timing of benefit payments.
Foreign plans:
We sponsor various plans through certain of our foreign subsidiaries. These plans are the Canadian Plans and the U.K. Plan. The combined weighted average asset allocations of these plans by asset category were as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
Asset Category:
|
|
|
|
Equity Securities and Commingled Mutual Funds
|
41
|
%
|
|
41
|
%
|
Fixed Income
|
58
|
%
|
|
58
|
%
|
Other
|
1
|
%
|
|
1
|
%
|
The target allocation for 2018 for the foreign plans, by asset class, is as follows:
|
|
|
|
|
|
|
|
Canadian
Plans
|
|
U.K. Plan
|
Asset Class:
|
|
|
|
United States Equity
|
27
|
%
|
|
10
|
%
|
Global Equity
|
23
|
%
|
|
12
|
%
|
Fixed Income
|
50
|
%
|
|
78
|
%
|
Fair value of plan assets
See
Note 25
for a detailed description of fair value measurements and the hierarchy established for valuation inputs. The following is a summary of total investments for our plans measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in thousands)
|
2018
|
Level 1
|
Level 2
|
Fixed income
|
$
|
304,961
|
|
$
|
—
|
|
$
|
304,961
|
|
Equities
|
—
|
|
—
|
|
—
|
|
Commingled and mutual funds
|
359,126
|
|
—
|
|
359,126
|
|
United States government securities
|
198,017
|
|
198,017
|
|
—
|
|
Cash and accrued items
|
9,821
|
|
9,816
|
|
5
|
|
Total pension and other postretirement benefit assets
|
$
|
871,925
|
|
$
|
207,833
|
|
$
|
664,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in thousands)
|
2017
|
Level 1
|
Level 2
|
Fixed income
|
$
|
352,484
|
|
$
|
—
|
|
$
|
352,484
|
|
Equities
|
33,525
|
|
33,525
|
|
—
|
|
Commingled and mutual funds
|
413,166
|
|
—
|
|
413,166
|
|
United States government securities
|
193,249
|
|
193,249
|
|
—
|
|
Cash and accrued items
|
14,578
|
|
12,585
|
|
1,993
|
|
Total pension and other postretirement benefit assets
|
$
|
1,007,002
|
|
$
|
239,359
|
|
$
|
767,643
|
|
Expected cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
Foreign Plans
|
(in thousands)
|
Pension
Benefits
|
Other
Benefits
|
|
Pension
Benefits
1
|
Other
Benefits
|
Expected employer contributions to trusts of defined benefit plans:
|
2019
(1)
|
$
|
2,201
|
|
$
|
1,900
|
|
|
$
|
1,768
|
|
$
|
157
|
|
Expected benefit payments
(2)
:
|
|
|
|
|
|
2019
|
$
|
75,753
|
|
$
|
1,857
|
|
|
$
|
2,641
|
|
$
|
157
|
|
2020
|
75,756
|
|
1,554
|
|
|
2,712
|
|
159
|
|
2021
|
75,412
|
|
1,434
|
|
|
3,008
|
|
153
|
|
2022
|
75,045
|
|
1,318
|
|
|
2,792
|
|
137
|
|
2023
|
74,631
|
|
1,206
|
|
|
2,802
|
|
131
|
|
2024-2028
|
357,776
|
|
4,510
|
|
|
15,687
|
|
533
|
|
|
|
(1)
|
Expected employer contributions to the U.S. Plan assume that relief under pension contribution waivers that were filed with the IRS in January 2019, which would defer minimum pension contributions for approximately one year to then be repaid over a five-year period. If the temporary hardship waivers are not fully granted, required employer contributions in 2019 could increase up to approximately
$15 million
in 2019.
|
|
|
(2)
|
Pension benefit payments are made from their respective plan's trust.
|
Defined contribution plans
We provide benefits under The B&W Thrift Plan (the "Thrift Plan"). The Thrift Plan generally provides for matching employer contributions of
50%
of the first
8%
of the participants compensation. These matching employer contributions are typically made in cash. Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately
$9.5 million
,
$14.4 million
and
$13.4 million
in the years ended December 31, 2018, 2017 and 2016, respectively.
Effective December 31, 2016, we merged the SPIG 401(k) defined contribution plans into the Thrift Plan. The SPIG 401(k) plan contributions were made in cash and were not material to our Consolidated Financial Statements in 2016.
Also, our salaried Canadian employees are provided with a defined contribution plan. As of and in the periods following January 1, 2012, we made cash, service-based contributions under this arrangement. The amount charged to expense for employer contributions was approximately
$0.3 million
,
$0.3 million
and
$0.4 million
in the years ended December 31, 2018, 2017 and 2016, respectively.
Multi-employer plans
One of our subsidiaries in the Babcock & Wilcox segment contributes to various multi-employer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The following table summarizes our contributions to multi-employer plans for the years covered by this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/PIN
|
|
Pension Protection
Act Zone Status
|
|
FIP/RP Status
Pending/
Implemented
|
|
Contributions
|
|
Surcharge Imposed
|
|
Expiration Date
Of Collective
Bargaining
Agreement
|
|
2018
|
|
2017
|
|
2016
|
|
|
2018
|
|
2017
|
|
(in millions)
|
|
Boilermaker-Blacksmith National Pension Trust
|
|
48-6168020/ 001
|
|
Yellow
|
|
Yellow
|
|
Yes
|
|
$
|
9.5
|
|
|
$
|
7.9
|
|
|
$
|
17.8
|
|
|
No
|
|
Described
Below
|
All Other
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
2.0
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14.4
|
|
|
$
|
9.9
|
|
|
$
|
21.0
|
|
|
|
|
|
Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust (the "Boilermaker Plan") is under a National Maintenance Agreement platform which is evergreen in terms of expiration. However, the agreement allows for termination by either party with a 90-day written notice. Our contributions to the Boilermaker Plan constitute less than 5% of total contributions to the Boilermaker Plan. All other contributions expense for all periods included in this report represents multiple amounts to various plans that, individually, are deemed to be insignificant.
NOTE 19
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
United States
|
$
|
144,900
|
|
$
|
94,300
|
|
Foreign
|
606
|
|
9,173
|
|
Total revolving debt
|
$
|
145,506
|
|
$
|
103,473
|
|
U.S. Revolving Credit Facility
On May 11, 2015, we entered into a credit agreement with a syndicate of lenders (as amended, the "Amended 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 and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments ("the Amendments") to the Amended Credit Agreement, including those to avoid default. The U.S. Revolving Credit Facility as in effect at December 31, 2018 was scheduled to mature on June 30, 2020 and provided for a senior secured revolving credit facility in an aggregate amount of up to
$347.0 million
, as amended and adjusted for completed asset sales. The proceeds from loans under the U.S. Revolving Credit Facility 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.
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 U.S. Revolving Credit Facility 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 U.S. Revolving Credit Facility requires 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 U.S. Revolving Credit Facility by a corresponding amount of such prepayments.
After giving effect to the Amendments through December 31, 2018, revolving loans outstanding under the U.S. Revolving Credit Facility 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 26
. 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%
was charged until October 9, 2018 and decreased 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. These include a maximum permitted senior debt leverage ratio and a minimum consolidated interest coverage ratio, each as defined in the Amended Credit Agreement. Compliance with these ratios were waived as of December 31, 2018 and new ratios were established in the subsequent amendments described in
Note 31
, as we would not have otherwise been in compliance at December 31, 2018.
At
December 31, 2018
, borrowings under the U.S. Revolving Credit Facility consisted of
$144.9 million
at a weighted average interest rate of
7.82%
. Usage under the U.S. Revolving Credit Facility consisted of
$144.9 million
of borrowings,
$29.1 million
of financial letters of credit and
$146.8 million
of performance letters of credit. At
December 31, 2018
, we had approximately
$25.0 million
available for borrowings or to meet letter of credit requirements primarily based on our overall facility size, our borrowing sublimit and giving effect to the limited waivers described in
Note 31
.
Since March 20, 2019, we have been nearly fully drawn on the U.S. Revolving Credit Facility, minimal additional amounts were available for borrowings or letters of credit, and we were in compliance with the terms of the Amended Credit Agreement subject to the limited waivers that cumulatively extend through
April 5, 2019
.
As a result, the U.S. Revolving Credit Facility balance as of December 31, 2018 is presented as a current liability in our Consolidated Balance Sheets.
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 December 31, 2018 and December 31, 2017, we had aggregate borrowings under these facilities of
$0.6 million
and
$9.2 million
respectively. Our weighted average interest rate on these facilities was
40.00%
and
6.07%
at December 31, 2018 and December 31, 2017, respectively. In 2018, our banking counterparties in Turkey began to require the conversion of these revolving credit facilities to Turkish lira denomination from euro denomination, resulting in correspondingly higher market interest rates. As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.
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
December 31, 2018
and December 31, 2017 was
$175.9 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
December 31, 2018
was
$80.2 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
$47.6 million
as of
December 31, 2018
.
We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. 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
December 31, 2018
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$202.7 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility in support of surety bonds was
$22.6 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 20
– LAST OUT TERM LOANS
The Last Out Term Loan components are as follows:
|
|
|
|
|
(in thousands)
|
December 31, 2018
|
Proceeds
|
$
|
30,000
|
|
Discount and fees
|
5,111
|
|
Paid-in-kind interest
|
132
|
|
Principal
|
35,243
|
|
Unamortized discount and fees
|
(4,594
|
)
|
Net debt balance
|
$
|
30,649
|
|
Tranche A-1
As referenced above, our Amended Credit Agreement required us to draw
$30.0 million
of net proceeds under Tranche A-1 of the Last Out Term Loans ("Tranche A-1"), which were borrowed from
B. Riley FBR, Inc.
, a related party, in September and October 2018. On November 19, 2018, Tranche A-1 was assigned from B. Riley FBR, Inc., a related party,
to Vintage Capital Management LLC
, also a related party. The face principal amount of Tranche A-1 is
$30.0 million
, which excludes a
$2.0 million
up-front fee that was added to the principal balance on the first funding date, transaction expenses, paid-in-kind interest, and original issue discounts of
10.00%
for each draw under Tranche A-1. Tranche A-1 is incurred under our Amended Credit Agreement and shares on a pari passu basis with the U.S. Revolving Credit Facility. Tranche A-1 matures and is payable in full on July 1, 2020, the day after the maturity date of the U.S. Revolving Credit Facility. Tranche A-1 may be prepaid, subject to the subordination provisions, but not re-borrowed.
Tranche A-1 bears interest at a rate per annum equal to (i) if designated a 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 Tranche A-1 and (ii) if designated a base rate loan, the then applicable prime rate set by the Administrative Agent 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 Tranche A-1. Subject to the subordination provisions, Tranche A-1 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 Tranche A-1 was
25.38%
on December 31, 2018. The effective rate of the Tranche A-1 may fluctuate over the life of the loan due to changes in LIBOR, the prime rates or any repayments. Interest expense associated with Tranche A-1 is detailed in
Note 26
.
As of December 31, 2018, the Tranche A-1 net carrying value of
$30.6 million
is
presented as a current liability in our Consolidated Balance Sheets as a result of the limited waivers that extend through April 5, 2019.
See
Note 31
for additional Last Out Term Loan transactions and modifications subsequent to December 31, 2018.
NOTE 21
– SECOND LIEN TERM LOAN FACILITY
Extinguishment of the Second Lien Term Loan Facility
Using
$212.6 million
of the proceeds from the 2018 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 26
.
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 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 amendments to the U.S. Revolving Credit Facility temporarily waived all events of default, including cross-default provisions.
NOTE 22
– 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 2018 Rights Offering. As amended, each right entitled holders to purchase
2.8
common shares at a price of
$2.00
per share. The 2018 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 2018 Rights Offering did not include an oversubscription privilege.
The 2018 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 2018 Rights Offering were
$248.4 million
. 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 2018 Rights Offering totaled
$3.3 million
.
NOTE 23
– CONTINGENCIES
Stockholder Litigation
On March 3, 2017 and March 13, 2017, the Company and certain of its former officers were named as defendants in
two
separate but largely identical complaints alleging violations of the federal securities laws. The
two
complaints were brought on behalf of a class of investors who purchased the Company's common stock between July 1, 2015 and February 28, 2017
and were filed in the United States District Court for the Western District of North Carolina (collectively, the "Stockholder Litigation"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. 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 and the case is presently in discovery.
The plaintiff in the Stockholder Litigation alleges fraud, misrepresentation and a course of conduct relating to certain projects undertaken by the Vølund & Other 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 "Federal Court 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 Federal Court 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 to stay the Federal Court Derivative Litigation, which was granted by the Court on August 13, 2018.
On November 14, 2018, the Company and certain of its present and former officers and directors were named as defendants in an additional shareholder derivative lawsuit filed in the North Carolina Superior Court (the "State Court Derivative Litigation"). The complaint in that action covers the same period and contains allegations substantially similar to those asserted in the pending Federal Court Derivative Litigation and Stockholder Litigation.
We believe the allegations in the Stockholder Litigation, Federal Court Derivative Litigation, and State Court 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 24
– 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
December 31, 2018
and
2017
, we had deferred approximately
$1.4 million
and
$1.8 million
, respectively, of net gains (losses) on these derivative financial instruments in AOCI.
At
December 31, 2018
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$16.5 million
at
December 31, 2018
with maturities extending to November 2019. These instruments consist primarily of contracts to purchase or sell Danish krone, Swedish króna, and Euros. 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:
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
2018
|
2017
|
Derivatives designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
532
|
|
$
|
1,088
|
|
Other assets
|
—
|
|
312
|
|
Accounts payable
|
—
|
|
105
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
14
|
|
$
|
7
|
|
Accounts payable
|
—
|
|
1,722
|
|
Other liabilities
|
—
|
|
12
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Derivatives designated as hedges:
|
|
|
|
Cash flow hedges
|
|
|
|
Foreign exchange contracts
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
1,074
|
|
$
|
3,346
|
|
$
|
2,208
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
|
Revenues
|
1,638
|
|
10,059
|
|
4,624
|
|
Cost of operations
|
(15
|
)
|
(118
|
)
|
195
|
|
Other-net
|
—
|
|
(7,438
|
)
|
(1,221
|
)
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
|
Other-net
|
(771
|
)
|
(5,277
|
)
|
4,518
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
Forward contracts
|
|
|
|
Loss recognized in income by location:
|
|
|
|
Other-net
|
$
|
(8
|
)
|
$
|
(3,436
|
)
|
$
|
(872
|
)
|
NOTE 25
– 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
|
December 31, 2018
|
Level 1
|
Level 2
|
Level 3
|
Mutual funds
|
$
|
1,283
|
|
$
|
—
|
|
$
|
1,283
|
|
$
|
—
|
|
Corporate notes and bonds
|
13,028
|
|
13,028
|
|
—
|
|
—
|
|
United States Government and agency securities
|
1,437
|
|
1,437
|
|
—
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
15,748
|
|
$
|
14,465
|
|
$
|
1,283
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Derivatives
|
December 31, 2018
|
December 31, 2017
|
Forward contracts to purchase/sell foreign currencies
|
$
|
546
|
|
$
|
(432
|
)
|
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in "other assets" on our Consolidated Balance Sheets with contractual maturities ranging from
0
-
6 years
.
Derivatives
Derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
|
|
•
|
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have reported in the accompanying Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
|
|
|
•
|
Revolving debt and Last Out Term Loans
. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as 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
December 31, 2018
and
December 31, 2017
.
|
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 18
). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
Our annual and interim goodwill impairment tests and second quarter 2018 impairment charges required significant fair value measurements using unobservable inputs (see
Note 14
). The fair values of the reporting units were 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 4
). The fair value of the net assets held for sale was based on the expected net proceeds for the sale of MEGTEC and Universal.
Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined based on an income approach using a discounted cash flow analysis or based on the price that the Company expects to receive upon the sale of these assets. Both of those approaches utilize unobservable inputs (See
Note 8
and
Note 16
).
NOTE 26
– SUPPLEMENTAL CASH FLOW AND INTEREST INFORMATION
In addition to non-cash items described in the Consolidated Statements of Cash Flows, we also recognized non-cash changes in our Consolidated Balance Sheets related to interest expense as described below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Accrued capital expenditures in accounts payable
|
$
|
139
|
|
$
|
1,383
|
|
$
|
2,751
|
|
We recognized the following cash activity in our Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Income tax payments (refunds), net
|
$
|
3,690
|
|
$
|
(10,889
|
)
|
$
|
10,781
|
|
Interest payments on our U.S. revolving credit facility
|
$
|
10,784
|
|
$
|
4,909
|
|
$
|
425
|
|
Interest payments on our second lien term loan facility
|
$
|
7,627
|
|
$
|
7,044
|
|
$
|
—
|
|
Interest expense in our Consolidated Financial Statements consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Components associated with borrowings from:
|
|
|
|
U.S. Revolving Credit Facility
|
$
|
12,284
|
|
$
|
5,051
|
|
$
|
1,669
|
|
Second Lien Term Loan Facility
|
7,460
|
|
7,211
|
|
—
|
|
Last Out Term Loan - cash interest
|
513
|
|
—
|
|
—
|
|
Last Out Term Loan - interest paid-in-kind
|
1,079
|
|
—
|
|
—
|
|
Foreign revolving credit facilities
|
716
|
|
1,021
|
|
753
|
|
|
22,052
|
|
13,283
|
|
2,422
|
|
Components associated with amortization or accretion of:
|
|
|
|
U.S. Revolving Credit Facility deferred financing fees and commitment fees
|
22,943
|
|
6,270
|
|
1,244
|
|
Second Lien Term Loan Facility discount and financing fees
|
3,202
|
|
3,226
|
|
—
|
|
Last Out Term Loan discount and financing fees
|
552
|
|
—
|
|
—
|
|
|
26,697
|
|
9,496
|
|
1,244
|
|
|
|
|
|
Other interest expense
|
864
|
|
3,154
|
|
36
|
|
|
|
|
|
Total interest expense
|
$
|
49,613
|
|
$
|
25,933
|
|
$
|
3,702
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
2017
|
2016
|
Held by foreign entities
|
$
|
35,522
|
|
$
|
42,490
|
|
$
|
89,042
|
|
Held by United States entities
(1)
|
7,692
|
|
1,227
|
|
(1,616
|
)
|
Cash and cash equivalents of continuing operations
|
43,214
|
|
43,717
|
|
87,426
|
|
|
|
|
|
Reinsurance reserve requirements
|
11,768
|
|
21,061
|
|
21,189
|
|
Restricted foreign accounts
|
5,297
|
|
4,919
|
|
6,581
|
|
Restricted cash and cash equivalents
|
17,065
|
|
25,980
|
|
27,770
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash of continuing operations shown in the Consolidated Statements of Cash Flows
|
$
|
60,279
|
|
$
|
69,697
|
|
$
|
115,196
|
|
|
|
|
|
Total cash and cash equivalents of discontinued operations
(2)
|
$
|
—
|
|
$
|
12,950
|
|
$
|
8,461
|
|
(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 4
for further information.
Our U.S. Revolving Credit Facility described in
Note 19
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 27
– RELATED PARTY TRANSACTIONS
Transactions with AIP
The second lien term loan entered into on August 9, 2017 and related repurchase of shares of our common stock as described in
Note 21
were related party transactions.
Transactions with B. Riley and its Affiliates
B. Riley Financial, Inc. and its affiliates (collectively, "B. Riley") became the beneficial owner of greater than
five
percent of our common stock in May 2018, upon completion of the 2018 Rights Offering described in
Note 22
. As of December 31, 2018, B. Riley Capital Management, LLC owns approximately
6.43%
of our outstanding common stock.
Tranche A-1 of the Last Out Term Loans described in
Note 20
was a related party transaction with
B. Riley FBR, Inc.
until November 19, 2018, when it was assigned
to Vintage Capital Management LLC
, also a related party.
Tranche A-2 of the Last Out Term Loans provided proceeds of
$10 million
on March 20, 2019, described in
Note 31
, was also a related party transaction with B. Riley FBR, Inc.
The Company also entered an agreement with BPRI Executive Consulting, LLC on November 19, 2018 for the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020, unless terminated by either party with thirty days written notice. The amount paid in 2018 related to this agreement was
$0.1 million
. This agreement also granted stock appreciation rights to BRPI Executive Consulting, LLC as described in
Note 9
.
See also
Note 31
.
Transactions with Vintage Capital Management, LLC
As of December 31, 2018, Vintage Capital Management, LLC ("Vintage") owned approximately
14.86%
of our outstanding common stock.
On April 10, 2018, the Company and Vintage entered into an equity commitment agreement (the "Equity Commitment Agreement"), which Equity Commitment Agreement amended and restated in its entirety the prior letter agreement, dated as of March 1, 2018, between the Company and Vintage, pursuant to which Vintage agreed to backstop the 2018 Rights Offering for the purpose of providing at least
$245 million
of new capital.
The Last Out Term Loan described in
Note 20
also became a related party transaction with Vintage beginning November 19, 2018, after it was assigned to Vintage from
B. Riley FBR, Inc.
, also a related party.
See also
Note 31
.
NOTE 28
– FUTURE MINIMUM PAYMENTS
Operating leases
Future minimum payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2018 are as follows (in thousands):
|
|
|
|
|
(in thousands)
|
|
2019
|
$
|
6,748
|
|
2020
|
$
|
5,035
|
|
2021
|
$
|
3,545
|
|
2022
|
$
|
2,025
|
|
2023
|
$
|
1,236
|
|
Thereafter
|
$
|
792
|
|
Total rental expense for the years ended December 31, 2018, 2017 and 2016, was
$8.3 million
,
$8.8 million
and
$7.0 million
, respectively.
In September 2018, we announced that we would consolidate most of our Barberton and Copley, Ohio operations into new, leased office space in Akron, Ohio in approximately the third quarter of 2019. As of December 31, 2018, the operating lease agreement for the office space in Akron had not yet commenced; it will commence when it is ready for occupation. The lease has an initial term of
fifteen years
, with an option to extend up to
two
additional
ten
year terms. Base rent will increase
two
percent annually, making the total future minimum payments during the initial term of the lease approximately
$55 million
. This amount is not included in the table above.
Long-term borrowings
Maturities of our long-term borrowings in the five years succeeding December 31, 2018 are as follows (in thousands):
|
|
|
|
|
(in thousands)
|
|
2019
(1) (2)
|
$
|
176,155
|
|
2020
|
$
|
—
|
|
2021
|
$
|
—
|
|
2022
|
$
|
—
|
|
2023
|
$
|
—
|
|
Thereafter
|
$
|
—
|
|
|
|
(1)
|
As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.
|
|
|
(2)
|
The maturity date of the U.S. Revolving Credit Facility and the Last Out Term Loans are in 2020. However, as of December 31, 2018, the U.S. Revolving Credit Facility and the Last Out Term Loan amounts are
presented as a current liability in our Consolidated Balance Sheets as a result of the limited waivers that extend through April 5, 2019.
|
NOTE 29
– QUARTERLY FINANCIAL DATA
The following tables set forth selected unaudited quarterly financial information for the years ended December 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Quarter ended
|
|
March 31, 2018
|
|
June 30, 2018
|
|
Sept. 30, 2018
|
|
Dec. 31, 2018
|
Revenues
|
$
|
253,176
|
|
|
$
|
291,337
|
|
|
$
|
294,963
|
|
|
$
|
222,912
|
|
Gross profit
|
$
|
(24,169
|
)
|
|
$
|
(41,066
|
)
|
|
$
|
10,462
|
|
|
$
|
(74,871
|
)
|
Operating loss
(1)
|
$
|
(106,428
|
)
|
|
$
|
(137,351
|
)
|
|
$
|
(45,147
|
)
|
|
$
|
(137,674
|
)
|
Equity in (loss) income of investees
|
$
|
(11,757
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154
|
|
Net loss attributable to shareholders
|
$
|
(120,433
|
)
|
|
$
|
(265,768
|
)
|
|
$
|
(105,688
|
)
|
|
$
|
(233,403
|
)
|
Loss per common share
|
|
|
|
|
|
|
|
Basic and diluted - Continuing
|
$
|
(2.65
|
)
|
|
$
|
(1.68
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(1.35
|
)
|
Basic and diluted - Discontinued
|
$
|
(0.08
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
(1)
Includes equity in income of investees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Quarter ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
Sept. 30, 2017
|
|
Dec. 31, 2017
|
Revenues
|
$
|
348,072
|
|
|
$
|
306,231
|
|
|
$
|
356,870
|
|
|
$
|
330,256
|
|
Gross profit
|
$
|
49,614
|
|
|
$
|
(69,593
|
)
|
|
$
|
30,753
|
|
|
$
|
13,444
|
|
Operating loss
(1)
|
$
|
(11,279
|
)
|
|
$
|
(146,586
|
)
|
|
$
|
(110,888
|
)
|
|
$
|
(47,610
|
)
|
Equity in income (loss) of investees
|
$
|
618
|
|
|
$
|
(15,232
|
)
|
|
$
|
1,234
|
|
|
$
|
3,513
|
|
Net loss attributable to shareholders
|
$
|
(7,045
|
)
|
|
$
|
(150,999
|
)
|
|
$
|
(114,302
|
)
|
|
$
|
(107,478
|
)
|
(Loss) earnings per common share
|
|
|
|
|
|
|
|
Basic and diluted - Continuing
|
$
|
(0.12
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
(2.56
|
)
|
Basic and diluted - Discontinued
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
(1)
Includes equity in income of investees.
Our quarterly results include the following items that significantly affect comparability across periods:
|
|
•
|
Actuarial gains and losses from marking to market our pension and postretirement benefit plan assets and liabilities (see
Note 18
). Such MTM adjustments resulted in (charges) gains of:
$(72.2) million
in the fourth quarter of 2018,
$4.2 million
in the third quarter of 2018,
$0.5 million
in the second quarter of 2018,
$9.8 million
in the fourth quarter of 2017, and
$(1.1) million
in the first quarter of 2017.
|
|
|
•
|
$39.8 million
pre-tax gain in the third quarter of 2018 for the sale of PBRRC, a subsidiary that held
two
operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida as described in
Note 5
.
|
|
|
•
|
$18.4 million
and
$18.2 million
of other-than-temporary impairment of our interest in TBWES, an equity method investment in India, in the first quarter of 2018 and the second quarter of 2017, respectively. These are described in
Note 13
.
|
|
|
•
|
Goodwill impairment charges totaled
$37.5 million
in the second quarter of 2018 and
$86.9 million
in the third quarter of 2017 as described in
Note 14
.
|
|
|
•
|
Restructuring and spin-off transaction costs totaled
$6.9 million
in the first quarter of 2018 and
$6.3 million
in the fourth quarter of 2017.
|
|
|
•
|
Financial advisory fees totaled
$7.2 million
in the third quarter of 2018 and
$2.3 million
in the fourth quarter of 2017.
|
|
|
•
|
Intangible asset impairment of
$2.5 million
was recorded in the fourth quarter of 2018 for the SPIG segment as described in Note 6.
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•
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An allowance for doubtful accounts of
$5.8 million
was recorded in the fourth quarter of 2018 for our China operation as described in Note 6.
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•
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Changes in the estimates of the forecasted revenues and costs to complete six European Vølund loss contracts significantly affected the quarterly earnings throughout 2018 and 2017. These contracts and their status as of December 31, 2018 are described in
Note 7
.
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In the third quarter of 2018, we recognized
$99.6 million
of non-cash income tax charges to increase the valuation allowance against our remaining net deferred tax assets. In the fourth quarter of 2017, we recognized
$62.4 million
of additional income tax expense resulting from the enactment of new tax legislation in the United States on December 22, 2017. These are described in
Note 10
.
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NOTE 30
– 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. We adopted the new standard on January 1, 2019 and use the effective date as our date of initial application. In July 2018, the FASB issued an update that provided an additional transition option that allows companies to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented in the Consolidated Financial Statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of
adoption. We elected this optional transition method. We also elected the “package of practical expedients”, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. However, we are not electing to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840.
We have substantially completed our assessment of the standard as well as implementation of our leasing software, including data upload and test procedures. We continue to finalize our calculations, including our discount rate assumptions, related to the new standard. We are also continuing to establish new processes and internal controls that may be required to comply with the new lease accounting and disclosure requirements set by the new standard. We expect the impact of the standard adoption to increase our assets and liabilities within our Consolidated Balance Sheet by approximately
$14 million
to
$19 million
, but do not expect a material impact on our results of operations or cash flows.
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 will be immaterial.
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.
NOTE 31
– SUBSEQUENT EVENTS
Subsequent to December 31, 2018, we have entered into a series of limited waivers (described below) to avoid default under our U.S. Revolving Credit Facility and Last Out Term Loans while we negotiated the settlement of the final two European Vølund loss contracts described in
Note 7
and negotiated terms for financing and the related further amendment to our Amended Credit Agreement to allow for that financing. On March 20, 2019, we borrowed
$10.0 million
of additional funding in the form of a Tranche A-2 Last Out Term Loan (described below) to support working capital needs.
Since March 20, 2019, we have been nearly fully drawn on the U.S. Revolving Credit Facility, minimal additional amounts were available for borrowings or letters of credit, and we were in compliance with the terms of the Amended Credit Agreement subject to the limited waivers that cumulatively extend through
April 5, 2019
.
As of
April 2, 2019
, the settlement of the final two European Vølund loss contracts has been completed pending payment of amounts due under the settlement. Binding agreement of this settlement, subject to payment, was a requirement of the lending group of the Amended Credit Agreement for further amendment. The additional financing required to make those settlement payments and to provide additional funding of working capital has not been yet been committed. Our financing plans and the status of those negotiations as of
April 2, 2019
are described more fully in
Note 1
.
March 15, 2019 Limited Waiver to the Amended Credit Agreement
On March 15, 2019, we entered into a limited waiver to our Amended Credit Agreement ("First Limited Waiver"), which waived our compliance with covenants in the Amended Credit Agreement and certain events of default through March 25, 2019.
March 19, 2019 Amendment and Limited Waiver to the Amended Credit Agreement
On March 19, 2019, we entered into an amendment and limited waiver (the "15th Amendment") to our Amended Credit Agreement, which replaced in full the First Limited Waiver, and extended the waivers of our compliance with covenants in the Amended Credit Agreement and certain events of default through March 29, 2019. The 15th Amendment also made
certain other modifications to the Amended Credit Agreement. Specifically, the 15th Amendment provided
$10.0 million
in additional commitments from B. Riley Financial, Inc. under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. This borrowing under Tranche A-2 of Last Out Term Loans was generally made on terms, including interest rate, maturity and prepayment, that are the same as our Tranche A-1 of the Last Out Term Loans.
Certain of the lenders, as well as certain of their respective affiliates, have performed and may in the future perform for us and our subsidiaries, various commercial banking, investment banking, lending, underwriting, trust services, financial advisory and other financial services, for which they have received and may in the future receive customary fees and expenses. B. Riley is a significant stockholder, owning approximately
6.43%
of our outstanding common stock. See also
Note 27
.
March 29, 2019 Limited Waiver to the Amended Credit Agreement
On March 29, 2019, we entered into a limited waiver (the “Third Limited Waiver”) to our Amended Credit Agreement, which waives our compliance with certain covenants in the Amended Credit Agreement, including but not limited to covenants (1) requiring that we maintain a minimum liquidity amount of
$40.0 million
as a condition to borrowing both at the time of any credit extension request and on the proposed date of the credit extension (as defined in the Amended Credit Agreement), provided that we must maintain a minimum liquidity amount of
$35.0 million
as a condition to borrowing both at the time of any credit extension request and on the proposed date of the credit extension, (2) requiring that we maintain the specified consolidated interest coverage and senior leverage coverage ratios contained in the Amended Credit Agreement, (3) requiring that we maintain a minimum liquidity amount of
$40.0 million
as of the last business day of any calendar month, (4) specifying certain contract completion milestones that we are required to meet in connection with
one
renewable energy project, (5) limiting the amount of certain net losses permitted in connection with renewable energy projects, and (6) requiring our independent registered public accounting firm certify our consolidated financial statements without a going concern qualification. The Third Limited Waiver also waives certain events of default related to projects in our Vølund & Other Renewables segment. The Third Limited Waiver will terminate at 5:00 p.m., New York City time, on
April 5, 2019
unless earlier terminated upon the occurrence of, among other things, an event of default under the Amended Credit Agreement, our payment of certain fees in connection with certain renewable energy projects or our failure to maintain a minimum liquidity amount of
$35.0 million
as a condition to borrowing both at the time of any credit extension request and on the proposed date of the credit extension.