Quarterly Report (10-q)

Date : 05/09/2019 @ 10:04PM
Source : Edgar (US Regulatory)
Stock : Babcock & Wilcox Enterprises, Inc. (BW)
Quote : 0.4078  -0.0022 (-0.54%) @ 5:51PM
Brush Engineered Mat share price Chart

Quarterly Report (10-q)




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File No. 001-36876  

BABCOCK & WILCOX ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
47-2783641
(State or other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
20 SOUTH VAN BUREN AVENUE
 
 
BARBERTON, OHIO
 
44203
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (330) 753-4511
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨  
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨   
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes   ¨     No   x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
BW
New York Stock Exchange
The number of shares of the registrant's common stock outstanding at May 1, 2019 was 168,880,626 .

1





BABCOCK & WILCOX ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2





PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three months ended March 31,
(in thousands, except per share amounts)
2019
2018
Revenues
$
231,936

$
253,176

Costs and expenses:
 
 
Cost of operations
201,067

277,345

Selling, general and administrative expenses
42,399

59,409

Advisory fees and settlement costs
13,610

3,089

Restructuring activities and spin-off transaction costs
6,079

6,862

Research and development costs
743

1,142

Total costs and expenses
263,898

347,847

Equity in income and impairment of investees

(11,757
)
Operating loss
(31,962
)
(106,428
)
Other income (expense):
 
 
Interest expense
(11,134
)
(13,452
)
Interest income
559

153

Benefit plans, net
3,030

6,997

Foreign exchange
(10,153
)
2,457

Other – net
420

397

Total other expense
(17,278
)
(3,448
)
Loss before income tax expense
(49,240
)
(109,876
)
Income tax expense
626

6,963

Loss from continuing operations
(49,866
)
(116,839
)
Loss from discontinued operations, net of tax

(3,496
)
Net loss
(49,866
)
(120,335
)
Net income (loss) attributable to noncontrolling interest
101

(98
)
Net loss attributable to stockholders
$
(49,765
)
$
(120,433
)
 
 
 
Basic and diluted loss per share - continuing operations
$
(0.29
)
$
(2.65
)
Basic and diluted (loss) earnings per share - discontinued operations

(0.08
)
Basic and diluted loss per share
$
(0.29
)
$
(2.73
)





Shares used in the computation of earnings per share:
 
 
Basic and diluted
168,812

44,187

See accompanying notes to Condensed Consolidated Financial Statements.

3





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three months ended March 31,
(in thousands)
2019
2018
Net loss
$
(49,866
)
$
(120,335
)
Other comprehensive income (loss):
 
 
 Currency translation adjustments (CTA), net of taxes
10,260

3,223

 
 
 
Reclassification of CTA to net loss

(2,044
)
 
 
 
Derivative financial instruments:
 
 
Unrealized (losses) gains on derivative financial instruments
(1,311
)
1,601

Income tax (benefit) expense
(133
)
377

Unrealized (losses) gains on derivative financial instruments, net of taxes
(1,178
)
1,224

Derivative financial instrument gains (losses) reclassified into net income
289

(1,628
)
Income tax expense (benefit)
65

(356
)
Reclassification adjustment for gains (losses) included in net loss, net of taxes
224

(1,272
)
 
 
 
Benefit obligations:
 
 
Unrealized losses on benefit obligations, net of taxes

(55
)
 
 
 
Amortization of benefit plan benefits
(356
)
(384
)
 
 
 
Other comprehensive income
8,950

692

Total comprehensive loss
(40,916
)
(119,643
)
Comprehensive income (loss) attributable to noncontrolling interest
122

463

Comprehensive loss attributable to stockholders
$
(40,794
)
$
(119,180
)
See accompanying notes to Condensed Consolidated Financial Statements.

4





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
March 31, 2019
December 31, 2018
Cash and cash equivalents
$
43,527

$
43,214

Restricted cash and cash equivalents
6,959

17,065

Accounts receivable – trade, net
203,244

197,203

Accounts receivable – other
56,982

44,662

Contracts in progress
136,407

144,727

Inventories
63,789

61,323

Other current assets
45,861

41,425

Total current assets
556,769

549,619

Net property, plant and equipment
84,952

90,892

Goodwill
47,131

47,108

Intangible assets
29,116

30,793

Right-of-use assets
15,067


Other assets
31,842

27,085

Total assets
$
764,877

$
745,497

 
 
 
Revolving credit facilities
$
175,300

$
145,506

Last out term loans
42,413

30,649

Accounts payable
202,938

199,882

Accrued employee benefits
23,092

19,319

Advance billings on contracts
155,279

149,367

Accrued warranty expense
44,824

45,117

Lease liabilities
4,895


Other accrued liabilities
117,150

122,149

Total current liabilities
765,891

711,989

Pension and other accumulated postretirement benefit liabilities
277,773

281,647

Noncurrent lease liabilities
9,976


Other noncurrent liabilities
29,089

29,158

Total liabilities
1,082,729

1,022,794

Commitments and contingencies


Stockholders' (deficit) equity:
 
 
Common stock, par value $0.01 per share, authorized 200,000 shares; issued and outstanding 168,862 and 168,791 shares at March 31, 2019 and December 31, 2018, respectively
1,748

1,748

Capital in excess of par value
1,047,466

1,047,062

Treasury stock at cost, 5,924 and 5,872 shares at March 31, 2019 and December 31, 2018, respectively
(105,612
)
(105,590
)
Accumulated deficit
(1,267,679
)
(1,217,914
)
Accumulated other comprehensive loss
(2,482
)
(11,432
)
Stockholders' deficit attributable to shareholders
(326,559
)
(286,126
)
Noncontrolling interest
8,707

8,829

Total stockholders' deficit
(317,852
)
(277,297
)
Total liabilities and stockholders' deficit
$
764,877

$
745,497

See accompanying notes to Condensed Consolidated Financial Statements.

5





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY

 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Stockholders’
Equity (Deficit)
 
 
Shares
Par Value
 
 
(in thousands, except share and per share amounts)
December 31, 2017 Balance
44,065

$
499

$
800,968

$
(104,785
)
$
(492,150
)
$
(22,429
)
$
8,600

$
190,703

 
 
 
 
 
 
 
 
 
Net loss




(120,433
)

98

(120,335
)
Revenue recognition standard adoption




(472
)


(472
)
Currency translation adjustments





1,179

(25
)
1,154

Derivative financial instruments





(48
)

(48
)
Defined benefit obligations





(439
)

(439
)
Available-for-sale investments




38

(38
)


Stock-based compensation charges
316

4

149

(720
)



(567
)
March 31, 2018 Balance
44,381

$
503

$
801,117

$
(105,505
)
$
(613,017
)
$
(21,775
)
$
8,673

$
69,996


 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Stockholders’
(Deficit) Equity
 
 
Shares
Par Value
 
 
(in thousands, except share and per share amounts)
December 31, 2018 Balance
168,791

$
1,748

$
1,047,062

$
(105,590
)
$
(1,217,914
)
$
(11,432
)
$
8,829

$
(277,297
)
 
 
 
 
 
 
 
 
 
Net loss




(49,765
)

(101
)
(49,866
)
Currency translation adjustments





10,260

(21
)
10,239

Derivative financial instruments





(954
)

(954
)
Defined benefit obligations





(356
)

(356
)
Stock-based compensation charges
71


404

(22
)



382

March 31, 2019 Balance
168,862

$
1,748

$
1,047,466

$
(105,612
)
$
(1,267,679
)
$
(2,482
)
$
8,707

$
(317,852
)

See accompanying notes to Condensed Consolidated Financial Statements.

6





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three months ended March 31,
(in thousands)
 
2019
2018
Cash flows from operating activities:
 
 
Net loss
 
$
(49,866
)
$
(120,335
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization of long-lived assets
 
7,306

9,070

Amortization of deferred financing costs, debt discount and payment-in-kind interest
 
5,695

4,951

Amortization of right of use assets
 
1,543


Income from equity method investees
 

(6,605
)
Other-than-temporary impairment of equity method investment in TBWES
 

18,362

Losses on asset disposals and impairments
 

527

(Benefit from) provision for deferred income taxes, including valuation allowances
 
(175
)
1,056

Mark to market losses (gains) and prior service cost amortization for pension and postretirement plans
 
42

(439
)
Stock-based compensation, net of associated income taxes
 
404

153

Changes in assets and liabilities:
 
 
 
Accounts receivable
 
192

17,337

Contracts in progress and advance billings on contracts
 
9,894

(18,331
)
Inventories
 
(3,239
)
4,266

Income taxes
 
(49
)
10,126

Accounts payable
 
4,594

(3,038
)
Accrued and other current liabilities
 
6,480

(3,785
)
Accrued contract loss
 
(30,903
)
6,923

Pension liabilities, accrued postretirement benefits and employee benefits
 
(594
)
(9,640
)
Other, net
 
10,980

4,565

Net cash used operating activities
 
(37,696
)
(84,837
)
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
 
(288
)
(3,204
)
Proceeds from sale of business
 

5,105

Proceeds from sale of equity method investments in joint venture
 

21,078

Purchases of available-for-sale securities
 
(6,036
)
(9,612
)
Sales and maturities of available-for-sale securities
 
957

9,451

Other, net
 
95

167

Net cash (used) from investing activities
 
(5,272
)
22,985


7






 
 
Three months ended March 31,
(in thousands)
 
2019
2018
Cash flows from financing activities:
 
 
 
Borrowings under our U.S. revolving credit facility
 
71,200

157,100

Repayments of our U.S. revolving credit facility
 
(40,800
)
(74,356
)
Borrowings under our last out term loan from related party
 
10,000


Repayments under our foreign revolving credit facilities
 
(600
)
(5,022
)
Shares of our common stock returned to treasury stock
 
(22
)
(720
)
Debt issuance costs
 
(6,675
)
(5,441
)
Other, net
 

(78
)
Net cash from financing activities
 
33,103

71,483

Effects of exchange rate changes on cash
 
72

(5,210
)
Net (decrease) increase in cash, cash equivalents and restricted cash
 
(9,793
)
4,421

Less net increase in cash and cash equivalents of discontinued operations
 

1,279

Net (decrease) increase in cash, cash equivalents and restricted cash of continuing operations
 
(9,793
)
3,142

Cash, cash equivalents and restricted cash of continuing operations, beginning of period
 
60,279

69,697

Cash, cash equivalents and restricted cash of continuing operations, end of period
 
$
50,486

$
72,839


See accompanying notes to Condensed Consolidated Financial Statements.

8





BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019

NOTE 1 – BASIS OF PRESENTATION

These interim financial statements of Babcock & Wilcox Enterprises, Inc. ("B&W Enterprises," "we," "us," "our" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission ("SEC") instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, as amended ("Annual Report"). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our Condensed Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.

Going Concern Considerations
 
The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

We face liquidity challenges from losses recognized on our six European Vølund EPC loss contracts described in Note 5 , 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 obligations at each of December 31, 2018 and March 31, 2019. 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 17 and Note 18 . We obtained waivers to the Amended Credit Agreement that waived, prevented or resolved these events of default as described in Note 17 and Note 18 .

To address our liquidity needs and the going concern uncertainty, we have taken the following actions in 2019 as follows:
received $150.0 million in gross proceeds from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in Note 18 , from B. Riley FBR, Inc., a related party, on April 5, 2019 ;
received $10.0 million in net proceeds from Tranche A-2 of the Last Out Term Loans, described in Note 18 , from B. Riley Financial, Inc. (together with its affiliates, including B. Riley FBR, Inc., "B. Riley"), a related party, on March 20, 2019 ;
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over four of the six European Vølund EPC loss contracts to the customers by the end of the first quarter of 2019 and negotiated a settlement of the remaining two loss contracts as described in Note 5 , which was funded with the proceeds from Tranche A-3 of the Last Out Term Loans ;
entered into an additional settlement as described in Note 5 in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started, whereby our obligations and our risk from acting as the prime EPC should the project move forward was eliminated ; and
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 17 and Note 18 , the most recent of which was Amendment No. 16 dated April 5, 2019, which provided Tranche A-3 of the Last Out Term Loans described above and in Note 18 , reset the financial and other covenants, increased borrowing capacity under the U.S. Revolving Credit Facility by reducing the minimum liquidity requirement, allowed for the issuance of a limited amount of new letters of credit with respect to any future Vølund project, and permitted other letters of credit to expire up to one year after the maturity of the U.S. Revolving Credit Facility.

Management believes it has taken and is continuing to take prudent actions to address the substantial doubt regarding 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 because some matters may not fully be in our control.


9





In connection with Amendment No. 16 to the Amended Credit Facility that provided the Tranche A-3 Last Out Term Loan, covenant relief and operating flexibility, we also entered into the "Letter Agreement" with B. Riley and Vintage Capital Management LLC ("Vintage") (both related parties) on April 5, 2019, pursuant to which the parties agreed to use their reasonable best efforts to effect a series of equitization transactions for a portion of the Last Out Term Loans, subject to, among other things, shareholder approval. Management believes completion of the Equitization Transactions would improve our financial position and liquidity by reducing financing costs. These "Equitization Transactions," are more fully described in Note 19 . The issuance of any shares of our common stock (or other securities) in connection with the Equitization Transactions is subject to the receipt of all required shareholder approvals, and no shares of our common stock (or other securities) will be issued before such approvals have been obtained and the related registration statements being declared effective by the SEC, which are matters outside of our control.

Amendment No. 16 to the Amended Credit Facility also created a new event of default for failure to terminate the existing U.S. Revolving Credit Facility on or prior to March 15, 2020, which is within twelve months of the date of this filing. While Management believes it will be able to obtain additional financing to replace our U.S. Revolving Credit facility, the ability to do so will depend on credit markets and other matters that are outside of our control.

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 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 intend to complete a reverse stock split to cure the deficiency, subject to approval of our shareholders at our next annual meeting. Based on the expected timing of our annual shareholder meeting, the Company is permitted under NYSE rules to go beyond the six-month cure period to request required shareholder approval on a corporate action. Our common stock could also be delisted if we fail to satisfy any other continued listing standards. For example, based on our current shareholders' equity, our common stock may be subject to delisting if our average market capitalization over a consecutive 30 trading-day period is less than $50.0 million, subject to our ability to regain compliance with this listing standard during an applicable cure period. Further, our common stock could 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 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.

10






NOTE 2 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share of our common stock, net of noncontrolling interest:
 
Three months ended March 31,
(in thousands, except per share amounts)
2019
2018
Loss from continuing operations
$
(49,765
)
$
(116,937
)
Loss from discontinued operations, net of tax

(3,496
)
Net loss attributable to shareholders
$
(49,765
)
$
(120,433
)
 
 
 
Weighted average shares used to calculate basic and diluted earnings per share
168,812

44,187

 
 
 
Basic and diluted loss per share - continuing operations
$
(0.29
)
$
(2.65
)
Basic and diluted loss per share - discontinued operations

(0.08
)
Basic and diluted loss per share
$
(0.29
)
$
(2.73
)

Because we incurred a net loss in the three months ended March 31, 2019 and 2018 , basic and diluted shares are the same. If we had net income in the three months ended March 31, 2019 and 2018 , diluted shares would include an additional 0.4 million and 0.9 million shares, respectively.

We excluded 3.3 million and 2.0 million shares related to stock options from the diluted share calculation for the three months ended March 31, 2019 and 2018 , respectively, because their effect would have been anti-dilutive.

NOTE 3 – DISCONTINUED OPERATIONS

On October 5, 2018, we sold all of the capital stock of our MEGTEC and Universal businesses to Dürr Inc., a wholly owned subsidiary of Dürr AG, pursuant to a stock purchase agreement executed on June 5, 2018 for $ 130.0 million , subject to adjustment. We received $ 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.

The following table presents selected financial information regarding the discontinued operations of our former MEGTEC and Universal businesses included in the Condensed Consolidated Statements of Operations:
 
Three months ended March 31,
(in thousands)
2018
Revenue
$
58,181

Cost of operations
44,668

Selling, general and administrative
9,427

Research and development
365

Operating income
3,721

Income tax expense
7,118

Net loss
(3,496
)

11





The significant components of discontinued operations of our former MEGTEC and Universal businesses included in our Condensed Consolidated Statements of Cash Flows are as follows:
 
Three months ended March 31,
(in thousands)
2018
Depreciation and amortization
$
2,089

Provision for deferred income taxes
3,033

Purchase of property, plant equipment
(65
)

NOTE 4 – 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 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:
 
Three months ended March 31,
(in thousands)
2019
2018
Revenues:
 
 
Babcock & Wilcox segment
 
 
Retrofits
$
30,674

$
61,983

New build utility and environmental
68,907

12,847

Aftermarket parts and field engineering services
63,087

73,073

Industrial steam generation
47,010

14,906

Eliminations
(21,120
)
(3,683
)
 
188,558

159,126

Vølund & Other Renewable segment
 
 
Renewable new build and services
29,533

44,711

Operations and maintenance services
560

15,247

Eliminations
(561
)

 
29,532

59,958

SPIG segment
 
 
New build cooling systems
21,006

29,045

Aftermarket cooling system services
8,171

7,699

Eliminations
(275
)

 
28,902

36,744

 
 
 
Eliminations
(15,056
)
(2,652
)
 
$
231,936

$
253,176


12






Our primary measures of segment profitability are gross profit and 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. Beginning in the first quarter of 2019, pension benefit (expense), which affected only the Babcock & Wilcox segment, is also not allocated to adjusted EBITDA of the segments. Prior periods have been conformed to be comparable. 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 cash flows from operating activities as a measure of our liquidity. Adjusted EBITDA as presented below differs from the calculation used to compute our leverage ratio and interest coverage ratio as defined by our U.S. Revolving Credit Facility. Because all companies do not use identical calculations, the amounts presented for adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
 
Three months ended March 31,
(in thousands)
2019
2018
Gross profit (loss) (1) :
 
 
Babcock & Wilcox segment
$
31,106

$
30,863

Vølund & Other Renewable segment
(2,856
)
(50,449
)
SPIG segment
3,676

(2,751
)
Intangible amortization expense included in cost of operations
(1,057
)
(1,832
)

30,869

(24,169
)
 
 
 
Selling, general and administrative ("SG&A") expenses
(42,269
)
(59,172
)
Advisory fees and settlement costs
(13,610
)
(3,089
)
Intangible amortization expense included in SG&A
(130
)
(237
)
Restructuring activities and spin-off transaction costs
(6,079
)
(6,862
)
Research and development costs
(743
)
(1,142
)
Equity in income and impairment of investees

(11,757
)
Operating loss
$
(31,962
)
$
(106,428
)
(1) Intangible amortization is not allocated to the segments' gross profit, but depreciation is allocated to the segments' gross profit.


13






Three months ended March 31,
(in thousands)
2019
2018
Adjusted EBITDA




Babcock & Wilcox segment (1)  
$
8,964

$
4,177

Vølund & Other Renewable segment
(8,863
)
(61,754
)
SPIG segment
659

(7,310
)
Corporate (2)
(4,984
)
(11,614
)
Research and development costs
(743
)
(1,142
)

(4,967
)
(77,643
)





Restructuring activities and spin-off transaction costs
(6,079
)
(6,862
)
Financial advisory services
(3,958
)
(3,089
)
Settlement cost to exit Vølund contract (3)
(6,575
)

Advisory fees for settlement costs and liquidity planning
(3,077
)

Impairment of equity method investment in TBWES

(18,362
)
Gain on sale of equity method investment in BWBC

6,509

Depreciation & amortization
(7,306
)
(6,981
)
Operating loss
(31,962
)
(106,428
)
Interest expense, net
(10,575
)
(13,299
)
Net pension benefit before MTM
3,428

6,997

MTM loss from benefit plans
(398
)

Foreign exchange
(10,153
)
2,457

Other – net
420

397

Loss before income tax expense
(49,240
)
(109,876
)
Income tax expense
626

6,963

Loss from continuing operations
(49,866
)
(116,839
)
Loss from discontinued operations, net of tax

(3,496
)
Net loss
(49,866
)
(120,335
)
Net income (loss) attributable to noncontrolling interest
101

(98
)
Net loss attributable to stockholders
$
(49,765
)
$
(120,433
)
(1)  
The Babcock & Wilcox segment adjusted EBITDA for the three months ended March 31, 2018 excludes $7.0 million of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, that were previously included in the segment results. Beginning in 2019, Net pension benefits are no longer allocated to the segments, and prior periods have been adjusted to be presented on a comparable basis.
(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 $2.9 million in the three months ended March 31, 2018 .
(3)  
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement eliminates our obligations and our risk related to acting as the prime EPC should the project move forward.

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.

NOTE 5 – 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

14





effect of adopting Topic 606 that primarily related to transitioning the timing of certain sales commissions expense. The effect on revenue from adopting Topic 606 was not material for the three months ended March 31, 2018.

Contract Balances

The following represents the components of our contracts in progress and advance billings on contracts included in our Condensed Consolidated Balance Sheets:
(in thousands)
March 31, 2019
December 31, 2018
$ Change
% Change
Contract assets - included in contracts in progress:
 
 
 
 
Costs incurred less costs of revenue recognized
$
45,394

$
49,910

$
(4,516
)
(9
)%
Revenues recognized less billings to customers
91,013

94,817

(3,804
)
(4
)%
Contracts in progress
$
136,407

$
144,727

$
(8,320
)
(6
)%
Contract liabilities - included in advance billings on contracts:
 
 
 
 
Billings to customers less revenues recognized
$
152,416

$
140,933

$
11,483

8
 %
Costs of revenue recognized less cost incurred
2,863

8,434

(5,571
)
(66
)%
Advance billings on contracts
$
155,279

$
149,367

$
5,912

4
 %
 
 
 
 
 
Net contract balance
$
(18,872
)
$
(4,640
)
$
(14,232
)
307
 %
 
 
 
 
 
Accrued contract losses
$
25,890

$
61,651

$
(35,761
)
(58
)%

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.

Backlog

On March 31, 2019 we had $766.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 50% , 15% and 35% of our remaining performance obligations as revenue in the remainder of 2019, 2020 and thereafter, respectively.

Changes in Contract Estimates

In the three months ended March 31, 2019 and 2018 , we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
 
Three months ended March 31,
(in thousands)
2019
2018
Increases in gross profits for changes in estimates for over time contracts
$
9,525

$
5,337

Decreases in gross profits for changes in estimates for over time contracts
(9,396
)
(54,865
)
Net changes in gross profits for changes in estimates for over time contracts
$
129

$
(49,528
)

Vølund EPC Loss Contracts

We had six Vølund contracts for renewable energy facilities in Europe that were loss contracts at December 31, 2017. The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services. In the three months ended March 31, 2019 and 2018, we recorded $4.1 million and $52.6 million and in net losses, respectively, resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In the three months ended March 31, 2019, we did no t change our estimate of liquidated damages on these contracts. These changes in estimates in the three months ended March 31, 2018 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these six contracts by $13.3 million . The total anticipated liquidated damages associated with these six contracts were $88.6 million and $90.3 million at March 31, 2019 and March 31, 2018 , respectively.
 

15





As of March 2019, four of the six Vølund EPC 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 fifth loss contracts are related parties to each other, and a settlement agreement was reached on March 29, 2019 in order to limit our remaining risk related to these contracts. Under that settlement agreement, we paid a combined £70 million ( $91.5 million ) on April 5, 2019 in exchange for limiting and further defining our obligations under the 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 eliminated 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. 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. For the second loss project, the settlement limited 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.

As of March 31, 2019 , the status of these six Vølund EPC 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 March 31, 2019 , this contract is approximately 97%  complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. 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 quarter ended March 31, 2019 , we did no t recognize further charges on the contract. Our estimate at completion as of March 31, 2019 includes $9.1 million of total expected liquidated damages. As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $3.6 million . In the quarter ended March 31, 2018 , we recognized additional contract losses of $7.1 million as a result of differences in actual and estimated costs and schedule delays. As of March 31, 2018 , this contract had $2.7 million of accrued losses and was 97% complete.

The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of March 31, 2019 , this contract was approximately 98% complete. Trial operations began in 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 three months ended March 31, 2019 , we recognized additional contract losses of $0.8 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. Our estimate at completion as of March 31, 2019 includes $19.2 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of March 31, 2019 and 2018 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $1.4 million . In the three months ended March 31, 2018 , we recognized contract losses of $4.1 million from changes in the expected selling price, construction cost estimates and schedule delays, and as of March 31, 2018 , this contract had $9.4 million of accrued losses and was 87% complete.

The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of March 31, 2019 , this contract was approximately 99% complete. Warranty began in March 2018, when we agreed to a partial takeover with the customer, and we agreed to a full takeover by the customer at the end of October 2018, when we also agreed to a scheduled timeline for remaining punch list activities to be completed around the customer's future planned outages. During the three months ended March 31, 2019 , we did no t recognize additional charges on the contract. Our estimate at completion as of March 31, 2019 includes $6.7 million of total expected liquidated damages due to schedule delays. As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $0.3 million . In the three months ended March 31, 2018 , we recognized charges of $1.9 million from changes in our estimate at completion, and as of March 31, 2018 , this contract had $0.8 million of accrued losses and was 98% complete.

16






The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of March 31, 2019 , this contract was approximately 99% complete. Trial operations began in November 2018 and takeover by the customer occurred in February 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. During the three months ended March 31, 2019 , we recognized an $0.3 million additional contract charge due to changes in estimated cost to complete remaining punch list and other close out items. Our estimate at completion as of March 31, 2019 includes $20.8 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of March 31, 2019 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $0.8 million . In the three months ended March 31, 2018 , we recognized contract losses of $12.1 million from changes in the expected selling price, changes in construction cost estimates and schedule delays, and as of March 31, 2018 , this contract had $5.7 million of accrued losses and was 87% complete.

The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of March 31, 2019 , this contract was approximately 90% 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 three months ended March 31, 2019, we recognized contract losses of $2.3 million due to change in estimate in subcontractor close out costs. Our estimate at completion as of March 31, 2019 , includes $13.7 million of total expected liquidated damages due to schedule delays. As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $15.8 million . In the three months ended March 31, 2018 , we recognized charges of $18.2 million , respectively from changes in our estimate at completion, and as of March 31, 2018 , this contract had $23.5 million of accrued losses and was 61% 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 March 31, 2019 , this contract was approximately 98% complete. Trial operations began in December 2018 and customer takeover occurred on January 25, 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. The contract is in the warranty phase. During the three months ended March 31, 2019 , we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract charges of $0.8 million related to matters encountered in completing punch list items. Our estimate at completion as of March 31, 2019 includes $19.1 million of total expected liquidated damages due to schedule delays. As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $0.6 million . In the year ended March 31, 2018 , we recognized additional contract losses of $9.3 million changes in our estimate at completion, and as of March 31, 2018 , this contract had $3.5 million of accrued losses and was 83% 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 $36 million , which is included in the March 31, 2019 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.


17





During the third quarter of 2016, we determined it was probable that we would receive a DKK 100.0 million ( $15.5 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 Condensed Consolidated Balance Sheets, offset by a $12.2 million reserve at March 31, 2019 .

Other Vølund Contract Settlement

In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The £ 5.0 million ( $6.6 million ) settlement eliminates our obligations and our risk related to acting as the prime EPC should the project move forward.

SPIG U.S. Loss Contract

At March 31, 2019, SPIG had one significant loss contract, which is a contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S.   At March 31, 2019 , the design and procurement are substantially complete, and construction is underway.  Overall, the contract is 86% complete and it is expected be fully complete in mid-2019. As of March 31, 2019 , the reserve for estimated contract losses recorded in "other accrued liabilities" in our Condensed Consolidated Balance Sheets was $2.0 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 6 – RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS

The following tables summarize the restructuring activity and spin-off costs incurred by segment.
(in thousands)
 
Three months ended March 31, 2019
Total severance and related costs
Babcock & Wilcox segment
$
3,947

Vølund & Other Renewable segment
578

SPIG segment
144

Corporate
1,410

 
$
6,079


(in thousands)
 
 
 
 
Three months ended March 31, 2018
Severance and related costs
Exit costs
Spin-off transaction costs
Total
Babcock & Wilcox segment
$
1,093

$
143

$

$
1,236

Vølund & Other Renewable segment
494



494

SPIG segment
383



383

Corporate
4,374


375

4,749

 
$
6,344

$
143

$
375

$
6,862


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 certain global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale and our liquidity needs. Severance actions across our business units, including executive severances, resulted in $6.1 million and $6.9 million of expense in the three months ended March 31, 2019 and 2018 , respectively. Severance expense is recognized over the remaining service periods of affected employees, and as of March 31, 2019 , $2.0 million of total severance expense is remaining to be recognized based on actions taken through that date.


18





Restructuring liabilities are included in other accrued liabilities on our Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
 
Three months ended March 31,
(in thousands)
2019
2018
Balance at beginning of period  
$
7,359

$
2,244

Restructuring expense
6,079

5,888

Payments
(3,242
)
(2,218
)
Balance at March 31
$
10,196

$
5,914


Accrued restructuring liabilities at March 31, 2019 and 2018 relate primarily to employee termination benefits. Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the three months ended March 31, 2018, we recognized $0.6 million in non-cash restructuring expense related to losses on the disposals of long-lived assets.

NOTE 7 – PROVISION FOR INCOME TAXES

In the three months ended March 31, 2019, income tax expense was $0.6 million , resulting in an effective tax rate of (1.3)% . In the three months ended March 31, 2018, income tax expense was $7.0 million , with an effective tax rate of (6.3)% . 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.

Our effective tax rate for the three months ended March 31, 2019 is not reflective of the U.S. statutory rate primarily due to valuation allowances against our net deferred tax assets. In jurisdictions where we have available net operating loss carryforwards ("NOLs"), such as the U.S., Denmark and Italy, the existence of a full valuation allowance against deferred tax assets results in income tax benefit or expense relating primarily to discrete items. In other profitable jurisdictions, however, we may record income tax expense, even though we have established a full valuation allowance against our net deferred tax assets. We have favorable discrete items of $0.2 million in the three months ended March 31, 2019.

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.  In general, if an ownership change occurs, our ability to use net operating losses and other tax attributes (including certain credits and previously disallowed interest deductions) to reduce tax payments is limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the applicable long term tax exempt interest rate. 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 March 31, 2019, the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) 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

19





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 2019, we do not anticipate any FDII benefit or GILTI taxes but expect an interest limitation. 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.

NOTE 8 – COMPREHENSIVE INCOME

Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the three months ended March 31, 2019 and 2018 were as follows:
(in thousands)
Currency translation (loss) gain
Net unrealized gain (loss) on derivative instruments (1)
Net unrecognized (loss) gain related to benefit plans (net of tax)
Total
Balance at December 31, 2018
$
(10,834
)
$
1,362

$
(1,960
)
$
(11,432
)
Other comprehensive income (loss) before reclassifications
10,260

(1,178
)

9,082

Reclassified from AOCI to net income (loss)

224

(356
)
(132
)
Net other comprehensive income (loss)
10,260

(954
)
(356
)
8,950

Balance at March 31, 2019
$
(574
)
$
408

$
(2,316
)
$
(2,482
)
(1) The remaining unrealized FX gain/(loss) is expected to be recognized over time as the related projects are completed.

(in thousands)
Currency translation (loss) gain
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, 2017
$
(27,837
)
$
38

$
1,737

$
3,633

$
(22,429
)
ASU 2016-1 cumulative adjustment (1)  

(38
)


(38
)
Other comprehensive income (loss) before reclassifications
3,223


1,224

(55
)
4,392

Reclassified from AOCI to net income (loss)
(2,044
)

(1,272
)
(384
)
(3,700
)
Net other comprehensive income (loss)
1,179

(38
)
(48
)
(439
)
654

Balance at March 31, 2018
$
(26,658
)
$

$
1,689

$
3,194

$
(21,775
)
(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 (loss). The standard was 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.


20





The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
AOCI component
Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI
Three months ended March 31,
2019
2018
Release of currency translation gain with the sale of equity method investment
Equity in income and impairment of investees
$

$
2,044

 
Provision for income taxes


 
Net loss
$

$
2,044

 
 
 
 
Derivative financial instruments
Revenues
$

$
1,616

 
Cost of operations

12

 
Other
(289
)

 
Total before tax
(289
)
1,628

 
Provision (benefit) for income taxes
(65
)
356

 
Net income
$
(224
)
$
1,272

 
 
 
 
Amortization of prior service cost on benefit obligations
Benefit plans, net
$
356

$
384

 
Provision (benefit) for income taxes


 
Net income (loss)
$
356

$
384


NOTE 9 – INVENTORIES

The components of inventories are as follows:
(in thousands)
March 31, 2019
December 31, 2018
Raw materials and supplies
$
45,303

$
44,833

Work in progress
6,091

5,348

Finished goods
12,395

11,142

Total inventories
$
63,789

$
61,323


NOTE 10 – EQUITY METHOD INVESTMENTS

We do not have any remaining investments in equity method investees at either March 31, 2019 or December 31, 2018. 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 Condensed 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 Condensed 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 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. The other-than-temporary-impairment loss was classified in equity income of investees in the Condensed Consolidated Statements of Operations.

21






NOTE 11 - GOODWILL

The following summarizes the changes in the net carrying amount of goodwill as of March 31, 2019:
(in thousands)
Babcock & Wilcox
Balance at December 31, 2018
$
47,108

Currency translation adjustments
23

Balance at March 31, 2019
$
47,131


In January 2017, the Financial Accounting Standards Board ("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. Because the Babcock & Wilcox reporting unit had a negative carrying value, reasonable changes in the assumptions would not indicate impairment. No impairment indicators were identified during the three months ended March 31, 2019.

NOTE 12 – INTANGIBLE ASSETS

Our intangible assets are as follows:
(in thousands)
March 31, 2019
December 31, 2018
Definite-lived intangible assets
 
 
Customer relationships
$
24,638

$
24,764

Unpatented technology
14,887

15,098

Patented technology
2,601

2,616

Tradename
12,407

12,566

Backlog
17,760

17,760

All other
9,749

9,728

Gross value of definite-lived intangible assets
82,042

82,532

Customer relationships amortization
(17,608
)
(17,219
)
Unpatented technology amortization
(4,139
)
(3,760
)
Patented technology amortization
(2,380
)
(2,348
)
Tradename amortization
(3,820
)
(3,672
)
Acquired backlog amortization
(17,760
)
(17,760
)
All other amortization
(8,524
)
(8,285
)
Accumulated amortization
(54,231
)
(53,044
)
Net definite-lived intangible assets
$
27,811

$
29,488

Indefinite-lived intangible assets
 
 
Trademarks and trade names
$
1,305

$
1,305

Total intangible assets, net
$
29,116

$
30,793



22





The following summarizes the changes in the carrying amount of intangible assets:
 
Three months ended March 31,
(in thousands)
2019
2018
Balance at beginning of period
$
30,793

$
42,065

Amortization expense
(1,187
)
(2,069
)
Currency translation adjustments and other
(490
)
400

Balance at end of the period
$
29,116

$
40,396


Amortization of intangible assets is included in cost of operations and SG&A in our Condensed Consolidated Statement of Operations, but it is not allocated to segment results.

Estimated future intangible asset amortization expense is as follows (in thousands):
 
Amortization expense
Three months ending June 30, 2019
1,000

Three months ending September 30, 2019
1,000

Three months ending December 31, 2019
987

Twelve months ending December 31, 2020
3,453

Twelve months ending December 31, 2021
3,231

Twelve months ending December 31, 2022
3,165

Twelve months ending December 31, 2023
3,158

Twelve months ending December 31, 2024
3,044

Thereafter
8,773


NOTE 13 – PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment less accumulated depreciation is as follows:
(in thousands)
March 31, 2019
December 31, 2018
Land
$
3,552

$
3,575

Buildings
106,405

106,238

Machinery and equipment
181,134

181,825

Property under construction
2,244

2,290

 
293,335

293,928

Less accumulated depreciation
208,383

203,036

Net property, plant and equipment
$
84,952

$
90,892


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 near the end of the third quarter of 2019.  We do not expect to incur significant relocation costs; however, we expect $7.9 million of accelerated depreciation to be recognized through mid-2019, of which $2.0 million was recognized during the first quarter ended March 31, 2019 and $5.3 million has been recognized cumulatively, since the decision to relocate in the third quarter of 2019.

23






NOTE 14 – WARRANTY EXPENSE

We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows: 
 
Three months ended March 31,
(in thousands)
2019
2018
Balance at beginning of period
$
45,117

$
33,514

Additions
1,991

4,726

Expirations and other changes
(385
)
(1,356
)
Payments
(1,271
)
(2,739
)
Translation and other
(628
)
583

Balance at end of period
$
44,824

$
34,728


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.

NOTE 15 – LEASES

Accounting for leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . We adopted this new standard on January 1, 2019 and used the effective date as our date of initial application while continuing to present the comparative periods in accordance with the guidance under the lease standard in effect during those prior periods in the Condensed Consolidated Financial Statements. We recorded an immaterial cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. We 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 did not elect to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840.

We have implemented new lease accounting software and have established new processes and internal controls that are required to comply with the new lease accounting and disclosure requirements set forth by the new standard. See Note 26 for additional information about the impact of adopting ASC 842 in the Condensed Consolidated Financial Statements.

We determine if an arrangement is a lease at inception. Leases are included in Right-of-use (“ROU”) assets, Lease liabilities and Noncurrent lease liabilities in the Condensed Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As substantially all of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The ROU assets also include any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) together with the non-lease components (e.g., common-area maintenance costs) as a single lease component for all classes of underlying assets.

Additionally, 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 near the end of the third quarter of 2019. As of March 31, 2019, 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

24





rent will increase two percent annually, making the total future minimum payments during the initial term of the lease approximately $55 million . This lease, which has not yet commenced, is not included in the following tables.

Operating Leases

We have operating leases for real estate, vehicles, and certain equipment. We do not have any financing leases in our portfolio. Our leases have remaining lease terms of up to 10 years , some of which may include options to extend the leases for up to 5 years , and some of which may include options to terminate the leases within 1 year .

The components of lease expense were as follows:
 
Three Months Ended
(in thousands)
March 31, 2019
Operating lease expense
$
1,909

Short-term lease expense
2,861

Variable lease expense
112

Sublease income (1)
(10
)
   Total lease expense
$
4,872

(1) Sublease income excludes rental income from owned properties.

Other information related to leases is as follows:
 
Three Months Ended
(in thousands, except lease term and discount rate)
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from leases
$
2,101

Right-of-use assets obtained in exchange for lease liabilities:
 
Operating leases
$
201

Weighted-average remaining lease term:
 
Operating leases (in years)
3.5

Weighted-average discount rate:
 
Operating leases
9.50
%

Amounts relating to leases were presented in the Condensed Consolidated Balance Sheets as of March 31, 2019 in the following line items:
(in thousands)
March 31, 2019
Right-of-use assets
$
15,067

 
 
Liabilities:
 
Lease liabilities
$
4,895

Noncurrent lease liabilities
9,976

Total lease liabilities
$
14,871



25





Future minimum lease payments required under non-cancellable operating leases as of March 31, 2019 were as follows:
(in thousands)
 
2019 (excluding the three months ended March 31, 2019)
$
4,670

2020
5,032

2021
3,569

2022
1,987

2023
1,234

Thereafter
908

Total
$
17,400

Less imputed interest
(2,529
)
Lease liability
$
14,871


NOTE 16 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(in thousands)
2019
2018
 
2019
2018
Interest cost
$
10,860

$
9,757

 
$
121

$
97

Expected return on plan assets
(13,920
)
(16,230
)
 


Amortization of prior service cost
50

25

 
(539
)
(646
)
Recognized net actuarial loss (gain)
398


 


Benefit plans, net (1)
(2,612
)
(6,448
)
 
(418
)
(549
)
Service cost included in COS (2)
217

189

 
4

4

Net periodic benefit cost (benefit)
$
(2,395
)
$
(6,259
)
 
$
(414
)
$
(545
)
(1)  
Benefit plans, net, which is presented separately in the Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2)  
Service cost related to a small group of active participants is presented within cost of sales in the Condensed Consolidated Statement of Operations and is allocated to the Babcock & Wilcox segment.

Lump sum payments from our Canadian Plans resulted in an immaterial plan settlement gain during the three months ended March 31, 2019. The settlement also triggered an interim MTM remeasurement of the Canadian Plan's assets and liabilities that was a loss of $0.4 million in the three months ended March 31, 2019. Both the settlement gain and the MTM remeasurement are reflected in the "Recognized net actuarial loss (gain) " in the table above and are included in our Condensed Consolidated Statements of Operations in the "Benefit plans, net" line item.

We made contributions to our pension and other postretirement benefit plans totaling $1.5 million and $3.4 million during the three months ended March 31, 2019 and 2018, respectively. Expected employer contributions to the U.S. Plan assume that relief under pension contribution waivers that were filed with the IRS in January 2019 and are planned to be re-filed with the IRS later in 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.

NOTE 17 – REVOLVING DEBT

The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
(in thousands)
March 31, 2019
December 31, 2018
United States
$
175,300

$
144,900

Foreign

606

Total revolving debt
$
175,300

$
145,506


26






U.S. Revolving Credit Facility

On May 11, 2015, we entered into "the Amended Credit Agreement" with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") 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. As of March 31, 2019, we were in compliance with the terms of the Amended Credit Agreement subject to the limited waivers that extended through April 5, 2019. On April 5, 2019, we entered into Amendment No. 16 to the Amended Credit Agreement. Amendment No. 16 provides (i) $150.0 million in additional commitments from B. Riley FBR, Inc., under Tranche A-3 of last out term loans described in Note 18 and (ii) an incremental uncommitted facility of up to $15.0 million , to be provided by B. Riley or an assignee.

The U.S. Revolving Credit Facility as in effect at March 31, 2019 was scheduled to mature on June 30, 2020; however, Amendment No. 16 created a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020. The U.S. Revolving Credit Facility provides 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, capital expenditures, permitted acquisitions 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. As of March 31, 2019, we were nearly fully drawn on the U.S. Revolving Credit Facility, but we had availability of approximately $35 million on April 8, 2019 after giving effect to the proceeds received under Tranche A-3 of the Last Out Term Loans borrowed on April 5, 2019, making the Vølund contract settlement payments described in Note 5 .and repaying a portion of our existing revolving credit loans.

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, with the exception to the prepayment of certain Last Out Term Loans pursuant to the Equitization Transactions described in Note 19 ; such Last Out Term Loan prepayments are further limited by an aggregate principal amount of $86 million plus interest. 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 March 31, 2019, 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 24 . A commitment fee of 1.0% per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of $1.5 million was 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. Letter of credit fees are payable on the tenth business day after the last business day of each fiscal quarter. Commencing with Amendment No. 16, a deferred ticking fee of 1% will be charged if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental 1% per month after December 15, 2019. A contingent consent fee of 4% will be charged with respect to Amendment No. 16 if certain actions are not undertaken to refinance the facility by December 15, 2019.

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 was waived with respect to the quarter ended December 31, 2018 and new ratios were established in Amendment No. 16 commencing with respect to the quarter ended March 31, 2019. Amendment No. 16 also, among other items, (1) modifies the definition of EBITDA in the Credit Agreement to, among other things, include addbacks related to losses in

27





connection with the Vølund projects, fees and expenses related to the Amendment and prior waivers to the Credit Agreement and fees associated with Vølund project related settlement agreements, (2) reduces to $30 million the minimum liquidity we are required to maintain at the time of any credit extension request and at the last business day of any calendar month, (3) allows for the issuance of up to $20.0 million of new letters of credit with respect to any future Vølund project, (4) changes the consolidated interest coverage and senior leverage coverage ratios, (5) decreases the relief period borrowing sublimit, (6) changes or removes certain contract completion milestones that we had been required to meet in connection with one renewable energy project, (7) permits letters of credit to expire one year after the maturity of the revolving credit facility, (8) resets the loss basket for certain Vølund contracts to $10.0 million , (9) creates a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, (10) establishes a deferred ticking fee of 1% if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental 1% per month after December 15, 2019 and (11) provides for a contingent consent fee of 4% if certain actions are not undertaken to refinance the facility by December 15, 2019.

Effective beginning April 5, 2019 with Amendment No. 16, the maximum permitted senior debt leverage ratio, as defined in the Amended Credit Agreement, is:
9.75 :1.00 for the quarter ending March 31, 2019
9.25 :1.00 for the quarter ending June 30, 2019
6.75 :1.00 for the quarter ending September 30, 2019
6.00 :1.00 for the quarter ending December 31, 2019
3.50 :1.00 for the quarter ending March 31, 2020
3.25 :1.00 for the quarter ending June 30, 2020

provided that for the purpose of calculating the senior debt leverage ratio for the quarter ended March 31, 2019, the senior leverage ratio is calculated by giving effect of the prepayment of the revolving loans under the U.S. Revolving Credit Facility on April 8, 2019 as if such prepayment was made on March 31, 2019.

Effective beginning April 5, 2019 with Amendment No. 16, the minimum consolidated interest coverage ratio, as defined in the Amended Credit Agreement, is:
0.75 :1.00 for the quarter ending March 31, 2019
0.90 :1.00 for the quarter ending June 30, 2019
1.10 :1.00 for the quarter ending September 30, 2019
1.10 :1.00 for the quarter ending December 31, 2019
1.50 :1.00 for the quarter ending March 31, 2020
1.75 :1.00 for the quarter ending June 30, 2020

At March 31, 2019 , borrowings under the U.S. Revolving Credit Facility consisted of $175.3 million at a weighted average interest rate of 8.62% . Usage under the U.S. Revolving Credit Facility consisted of $175.3 million of borrowings, $28.9 million of financial letters of credit and $139.9 million of performance letters of credit. At March 31, 2019 , we had approximately $2.8 million available for borrowings or to meet letter of credit requirements primarily based on our overall facility size, our borrowing sublimit, and the limited waivers described in Note 19 .

Foreign Revolving Credit Facilities

Outside of the United States, we had revolving credit facilities in Turkey that were used to provide working capital to local operations. At December 31, 2018, we had aggregate borrowings under these facilities of $0.6 million whose weighted average interest rate was 40.0% . In 2018, our banking counterparties in Turkey began requiring 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 March 31, 2019 and December 31, 2018 was $153.0 million and $175.9 million , respectively. The aggregate value of all such letters of credit and bank guarantees that are partially secured by the U.S. Revolving Credit Facility as of March 31, 2019 was

28





$65.4 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 $43.6 million as of March 31, 2019 .

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 March 31, 2019 , bonds issued and outstanding under these arrangements in support of contracts totaled approximately $203.3 million . The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility in support of surety bonds was $22.7 million .

Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.

NOTE 18 – LAST OUT TERM LOANS

The components of the Last Out Term Loans are as follows:
(in thousands)
March 31, 2019
December 31, 2018
Proceeds
$
40,000

$
30,000

Discount and fees
5,111

5,111

Paid-in-kind interest
1,306

132

Principal
46,417

35,243

Unamortized discount and fees
(4,004
)
(4,594
)
Net debt balance
$
42,413

$
30,649


Last Out Term Loans are incurred under our Amended Credit Agreement and are pari passu with the U.S. Revolving Credit Facility except for certain payment subordination provisions. The Last Out Loans shall be subject to the same representations and warranties, covenants and events of default under the Amended Credit Agreement. In connection with Amendment No. 16, dated April 5, 2019, to the U.S. Revolving Credit Facility, as described above in Note 17 , the maturity date for all Last Out Term Loans was extended to December 31, 2020. As of March 31, 2019 and December 31, 2018, the Last Out Term Loans' net carrying values are presented as a current liability in our Condensed Consolidated Balance Sheets due to the uncertainty of our ability to refinance our U.S. Revolving Credit Facility as required by the amended Credit Agreement (as described above).

Tranche A-1

We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley FBR, Inc. , a related party, in three draws in September and October 2018. On November 19, 2018, Tranche A-1 was assigned to Vintage , 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. As of March 31, 2019, Tranche A-1 was payable in full on July 1, 2020, the day after the maturity date of the U.S. Revolving Credit Facility; however, Amendment No. 16 extended the maturity date of each of the Last Out Term Loans to December 31, 2020. Tranche A-1 may be prepaid, subject to the subordination provisions, but not re-borrowed.

As of March 31, 2019, Tranche A-1 bore 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 remainder 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. The total effective interest rate of Tranche A-1 was 25.53% and 25.38% on March 31, 2019 and December 31, 2018, respectively. 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 24 .

29






After giving effect to Amendment No. 16 dated April 5, 2019, all outstanding Last Out Term Loans bear interest at a fixed rate per annum of 15.5% per annum. of which 7.5% is payable in cash and 8% is payable in kind. If we complete the 2019 Rights Offering (as defined below) within six months of the date of the Amendment (subject to a three-month extension in certain circumstances) (the "Prepayment Period"), the interest rate on all outstanding last out term loans under the Credit Agreement will be a fixed rate per annum of 12% payable in cash. If we are unable to complete the 2019 Rights Offering within the Prepayment Period, the interest rate on all outstanding last out term loans under the Credit Agreement will be a fixed rate per annum of 18.0% , of which 7.5% is payable in cash and 10.5% is payable in kind. Amendment No. 16 also permits us to prepay up to $86.0 million of the Tranche A-3 last out term loans using the proceeds of the 2019 Rights Offering.

Per the Letter Agreement described in Note 19 , we agreed to a debt-for-equity exchange related to the Tranche A-1 Last Out Term Loan, that is conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. If the conditions of the exchange are met, we would then expect to complete concurrently with the closing of the 2019 Rights Offering a debt-for-equity exchange with the holders of all outstanding Tranche A-1 Last Out Term Loans, pursuant to which we will exchange shares of our common stock at the Subscription Price of $0.30 per share for an equal aggregate principal amount of Tranche A-1 Last Out Term Loans.

Tranche A-2

On March 19, 2019, we entered into an amendment and limited waiver ("Amendment No. 15") to our Amended Credit Agreement, which allowed us to borrow $10.0 million from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. As of March 31, 2019, Tranche A-2 was payable in full on July 1, 2020, the day after the maturity date of the U.S. Revolving Credit Facility; however, Amendment No. 16 extended the maturity date of each of the Last Out Term Loans to December 31, 2020. Tranche A-2 may be prepaid, subject to the subordination provisions, but not re-borrowed.

As of March 31, 2019, Tranche A-2 bore interest at a rate per annum equal to 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 remainder payable in kind by adding such accrued interest to the principal amount of Tranche A-2. The total effective interest rate of Tranche A-2 was 19.51% on March 31, 2019.

Tranche A-3 - Subsequent Event

Under Amendment No. 16 on April 5, 2019, we borrowed $150.0 million from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loan. The proceeds from the Tranche A-3 Last Out Term Loan were used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in Note 5 , structuring fees, transaction expenses and original issue discount, with the remainder used for working capital and general corporate purposes. Tranche A-3 included an original issue discount of 3.2% of the gross cash proceeds. Interest rates and maturity of Tranche A-3 are described above. Tranche A-3 may be prepaid, subject to the subordination provisions and as described in Note 19 , but not re-borrowed. Per the Letter Agreement described in Note 19 , we may repay a portion of the outstanding A-3 tranche from proceeds raised from 2019 Rights Offering.

NOTE 19 – EQUITIZATION TRANSACTIONS - SUBSEQUENT EVENTS

In connection with Amendment No. 16 to the Amended Credit Facility and the extension of the Tranche A-3 Last Out Term Loans, the Company, B. Riley and Vintage, each related parties, entered into the "Letter Agreement" on April 5, 2019, pursuant to which the parties agreed to use their reasonable best efforts to effect a series of equitization transactions for a portion of the Last Out Term Loans, subject to, among other things, shareholder approval. These transactions (the "Equitization Transactions") consist of: (i) a $50.0 million rights offering (the "2019 Rights Offering") allowing our shareholders to subscribe for shares of our common stock at a price of $0.30 per share (the "Subscription Price"), the proceeds of which will be used to prepay a portion of the Tranche A-3 Last Out Term Loans under the Amended Credit Agreement, (ii) the exchange of Tranche A-1 Last Out Term Loans under the Amended Credit Agreement for shares of our common stock at a price per share equal to the Subscription Price (the "Debt Exchange") and (iii) the issuance to B. Riley or its designees of an aggregate 16,667,667 warrants, each to purchase one share of our common stock at an exercise price of $0.01 per share (the "Warrant Issuance"). B. Riley FBR, Inc. has agreed to act as a backstop for the 2019 Rights Offering, by purchasing from us, at a price per share equal to the Subscription Price, all unsubscribed shares in the 2019 Rights Offering

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for cash or by exchanging an equal principal amount of outstanding Tranche A-2 or Tranche A-3 Last Out Term Loans that it holds. The issuance of any shares of our common stock (or other securities) in connection with the Equitization Transactions is subject to the receipt of all required shareholder approvals, and no shares of our common stock (or other securities) will be issued before such approvals have been obtained. Pursuant to the Letter Agreement, we have committed to seek shareholder approval of the following actions, among others, at our upcoming 2019 annual meeting of shareholders (the "Annual Meeting"): (1) an increase in the authorized number of shares of common stock to 500.0 million shares, (2) the Equitization Transactions, (3) a waiver of corporate opportunities with respect to directors nominated by B. Riley and Vintage to the fullest extent provided by law and (4) a reverse stock split to occur immediately after the closing of the Equitization Transactions.

The parties to the Letter Agreement have also agreed to negotiate one or more agreements that will provide B. Riley and Vintage with certain governance rights, including (i) the right for B. Riley and Vintage to each nominate up to three individuals to serve on our board of directors (the "Board"), subject to certain continued lending and equity ownership thresholds and (ii) pre-emptive rights permitting B. Riley to participate in future issuances of our equity securities. The size of Board will remain at seven directors.

In connection with the Letter Agreement, we also committed, subject to stockholder approval and in consultation with B. Riley and Vintage, to establish an equity pool of 16,666,667 shares of our common stock for issuance under our 2015 Long Term Incentive Plan with such terms (including any vesting period or performance targets), in such amounts and forms of awards as the Compensation Committee of the Board determines.

NOTE 20 – 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.

On May 4, 2018, we fully repaid the Second Lien Term Loan Facility using $212.6 million of the proceeds from the 2018 Rights Offering, 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. See Note 24 for the Second Lien Term Loan Facility's interest expense.

NOTE 21 – 2018 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 22 – 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

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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, subject to the tentative settlements described below.

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 the 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.

On April 16, 2019, following mediation, the Company reached a tentative settlement agreement regarding the Shareholder Litigation matter, which agreement is subject to negotiation of definitive settlement documentation and court approval, including the payment of $19.5 million to plaintiffs by the Company's insurance carriers. The $19.5 million payment by the Company is expected to be recovered in full from our insurance coverage. Within our Condensed Consolidated Balance Sheets as of March 31, 2019, the $19.5 million liability is recorded in "other accrued liabilities" and the $19.5 million insurance receivable is recorded in "accounts receivable - other".

The parties to the Federal Court and State Court Derivative Litigations held a mediation on April 17, 2019 in an attempt to resolve these pending matters. At this mediation, the parties reached an agreement in principle with plaintiffs’ counsel to resolve these cases based on certain corporate governance changes that the Company has already implemented or is willing to implement in the future and payment by certain of the Company’s insurance carriers of $1 million in attorneys’ fees and expenses to plaintiffs’ counsel.  There is no monetary payment associated with this settlement.

We believe the allegations in the Stockholder Litigation and the Federal Court Derivative Litigation and State Court Derivative Litigation were 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.


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NOTE 23 – FAIR VALUE MEASUREMENTS

The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic, Fair Value Measurements and Disclosures ).
(in thousands)
 
 
 
 
Available-for-sale securities
March 31, 2019
Level 1
Level 2
Level 3
Corporate notes and bonds
$
16,838

$
16,838

$

$

Mutual funds
1,283


1,283


United States Government and agency securities
2,383

2,383



Total fair value of available-for-sale securities
$
20,504

$
19,221

$
1,283

$


(in thousands)
 
 
 
 
Available-for-sale securities
December 31, 2018
Level 1
Level 2
Level 3
Corporate notes and bonds
$
13,028

$
13,028



$

Mutual funds
1,283


1,283


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)
 
Derivatives
March 31, 2019
December 31, 2018
Forward contracts to purchase/sell foreign currencies
$
 
$
546
 

Available-For-Sale Securities

Our investments in available-for-sale securities are presented in "other assets" on our Condensed Consolidated Balance Sheets with contractual maturities ranging from 0 - 6 years .
 
Derivatives
 
Derivative assets and liabilities usually 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.

As of March 31, 2019, we do not hold any derivative assets or liabilities. All such contracts were sold during the first quarter of 2019.
 
Other Financial Instruments

We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:

Cash and cash equivalents and restricted cash and cash equivalents . The carrying amounts that we have reported in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
Revolving debt 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 March 31, 2019 and December 31, 2018 .


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Non-Recurring Fair Value Measurements

The measurement of the net actuarial gain or loss associated with our pension and other postretirement plans was determined using unobservable inputs (see Note 16 ). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.

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 6 and Note 13 ).

NOTE 24 – SUPPLEMENTAL CASH FLOW AND INTEREST INFORMATION

In addition to non-cash items described in the Condensed Consolidated Statements of Cash Flows, we also recognized non-cash changes in our Condensed Consolidated Balance Sheets related to interest expense as described below:
 
Three months ended March 31,
(in thousands)
2019
2018
Accrued capital expenditures in accounts payable
$
24

$
300

Accreted interest expense on our Second Lien Term Loan Facility
$

$
2,369

 
We recognized the following cash activity in our Condensed Consolidated Financial Statements:
 
Three months ended March 31,
(in thousands)
2019
2018
Income tax payments (refunds), net
$
(78
)
$
1,822

Interest payments on our U.S. Revolving Credit Facility
2,403

1,687

Interest payments on our Last Out Term Loans
540


Interest payments on our Second Lien Term Loan Facility

5,303



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Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
 
Three months ended March 31,
(in thousands)
2019
2018
Components associated with borrowings from:
 
 
U.S. Revolving Credit Facility
$
3,550

$
2,345

Second Lien Term Loan Facility

5,269

Last Out Term Loans - cash interest
513


Last Out Term Loans - paid-in-kind interest
1,060


Foreign revolving credit facilities

134

 
5,123

7,748

Components associated with amortization or accretion of:
 
 
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
5,270

3,201

Second Lien Term Loan Facility - discount and financing fees

2,369

Last Out Term Loans - discount and financing fees
590


 
5,860

5,570

 
 
 
Other interest expense
151

134

 
 
 
Total interest expense
$
11,134

$
13,452


The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the Condensed Consolidated Balance Sheets that sum to the total of the same amounts in the Condensed Consolidated Statements of Cash Flows:
(in thousands)
March 31, 2019
December 31, 2018
March 31, 2018
December 31, 2017
Held by foreign entities
$
26,746

$
35,522

$
23,077

$
42,490

Held by United States entities
16,781

7,692

76

1,227

Cash and cash equivalents of continuing operations
43,527

43,214