NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
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 4
, which have required amendments and waivers to maintain compliance with the Amended Credit Agreement, inclusive of Amendments No. 16 and No. 17. 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 and the amendments and waivers are described in more detail in
Note 13
,
Note 14
and
Note 18
.
To address our liquidity needs and the going concern uncertainty, we have taken the following actions in 2019 as follows:
|
|
|
|
•
|
completed equitization transactions on July 23, 2019 as described in
Note 18
and
Note 17
, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise
$50.0 million
that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans;
|
|
|
|
|
•
|
executed a
one-for-ten
reverse stock split of our issued and outstanding common stock, which became effective on July 24, 2019;
|
|
|
|
|
•
|
completed the sale of a non-core materials handling business in Germany, Loibl GmbH ("Loibl") effective May 31, 2019 for
€10.0 million
(approximately
$11.4 million
)
, subject to adjustment, resulting in net receipt of
$7.4 million
;
|
|
|
|
|
•
|
received
$150.0 million
in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in
Note 14
, 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 14
, 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 five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in
Note 4
, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans
;
|
|
|
|
|
•
|
entered into an additional settlement as described in
Note 4
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
;
|
|
|
|
|
•
|
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 13
and
Note 14
, the most recent of which were Amendments No. 16 and No. 17, dated April 5, 2019 and August 7, 2019, respectively,
which provided Tranche A-3 of the Last Out Term Loans described above and in
Note 14
, reset the financial and other covenants, adjusted the interest rate of the
|
Last Out Term Loans, reset the maturity date of the Last Out Term Loans to December 31, 2020, 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, permitted other letters of credit to expire up to one year after the maturity of the U.S. Revolving Credit Facility, clarifies (Amendment No. 17) the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and resets the loss basket for certain Vølund contracts to
$15.0 million
to align with the clarification commencing with the quarter ending March 31, 2019; and
|
|
|
|
•
|
filed and plan to file for waiver of required minimum contributions to the U.S. Pension Plan as described in
Note 12
,
that if granted, would reduce cash funding requirements in 2019 by approximately
$15 million
and a similar or greater amount in 2020 and would increase contributions over the following five years. The waiver request for the first plan year remains under review by the IRS and the waiver request for the second plan year is expected to be filed later in 2019 or early 2020.
|
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.
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. Our ability to comply with the financial and other covenants of the Amended Credit Facility through that date are dependent upon achieving our forecasted financial results.
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 completed a reverse stock split effective as of July 24, 2019 to regain compliance, but there is no guarantee that this reverse stock split will enable us to cure this deficiency. 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.
Reverse Stock Split
On July 11, 2019, the Company's board of directors approved a reverse stock split of one-for-ten on the Company's issued and outstanding common stock which became effective on July 24, 2019. The one-for-ten reverse stock split automatically converted every ten shares of the Company's outstanding and treasury common stock prior to the effectiveness of the reverse stock split into one share of common stock. No fractional shares were issued in the reverse stock split. Instead, stockholders who would otherwise have held fractional shares received cash payments (without interest) in respect of such fractional shares. The reverse stock split did not impact any stockholder's percentage ownership of the Company, subject to the treatment of fractional shares. The reverse stock split was undertaken to increase the market price per share of the Company's common stock to allow the Company to regain compliance with the NYSE's continued listing standards relating to minimum price per share pending final approval by the NYSE.
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 June 30,
|
Six months ended June 30,
|
|
(in thousands, except per share amounts)
|
2019
|
2018
|
2019
|
2018
|
|
Loss from continuing operations
|
$
|
(28,334
|
)
|
$
|
(209,836
|
)
|
$
|
(78,099
|
)
|
$
|
(326,773
|
)
|
|
Loss from discontinued operations, net of tax
|
694
|
|
(55,932
|
)
|
694
|
|
(59,428
|
)
|
|
Net loss attributable to shareholders
|
$
|
(27,640
|
)
|
$
|
(265,768
|
)
|
$
|
(77,405
|
)
|
$
|
(386,201
|
)
|
|
|
|
|
|
|
|
Weighted average shares used to calculate basic and diluted earnings per share
(1)
|
18,366
|
|
13,616
|
|
18,362
|
|
9,235
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share - continuing operations
|
$
|
(1.54
|
)
|
$
|
(15.41
|
)
|
$
|
(4.26
|
)
|
$
|
(35.39
|
)
|
|
Basic and diluted earnings (loss) per share - discontinued operations
|
0.04
|
|
(4.11
|
)
|
0.04
|
|
(6.43
|
)
|
|
Basic and diluted loss per share
|
$
|
(1.50
|
)
|
$
|
(19.52
|
)
|
$
|
(4.22
|
)
|
$
|
(41.82
|
)
|
(1)
Weighted average shares used to calculate basic and diluted earnings per share reflect the bonus element for the 2019 Rights Offering on July 23, 2019 as described below and the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
In July 2019, the Company completed the 2019 Rights Offering, as described in
Note 17
, to existing common stockholders. Because the rights issuance was offered to all existing stockholders at an exercise price that was less than the fair value of the stock, the weighted average shares outstanding and basic and diluted earnings (loss) per share were adjusted retroactively to reflect the bonus element of the rights offering for all periods presented by a factor of
1.0875
. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in the three months ended June 30, 2019 and 2018 were
16,888 thousand
and
12,521 thousand
, respectively. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in the six months ended June 30, 2019 and 2018 were
16,884 thousand
and
8,492 thousand
, respectively.
Because we incurred a net loss in the three and six months ended
June 30, 2019
and
2018
, basic and diluted shares are the same.
If we had net income in the three months ended
June 30, 2019
and
2018
, diluted shares would include an additional
25.7 thousand
and
84.7 thousand
shares, respectively. If we had net income in the six months ended
June 30, 2019
and
2018
, diluted shares would include an additional
35.8 thousand
and
93.5 thousand
shares, respectively.
We excluded
123.4 thousand
and
321.1 thousand
shares related to stock options from the diluted share calculation for the three months ended
June 30, 2019
and
2018
, respectively, because their effect would have been anti-dilutive. We excluded
226.6 thousand
and
248.7 thousand
shares related to stock options from the diluted share calculation for the six months ended
June 30, 2019
and
2018
, respectively, because their effect would have been anti-dilutive.
NOTE 3
– SEGMENT REPORTING
Our operations are assessed based on
three
reportable segments which are summarized as follows:
|
|
|
|
•
|
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 June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Revenues:
|
|
|
|
|
|
Babcock & Wilcox segment
|
|
|
|
|
|
Retrofits
|
$
|
44,923
|
|
$
|
69,344
|
|
$
|
75,597
|
|
$
|
131,327
|
|
|
New build utility and environmental
|
55,377
|
|
42,194
|
|
124,284
|
|
55,041
|
|
|
Aftermarket parts and field engineering services
|
64,308
|
|
63,299
|
|
127,395
|
|
136,372
|
|
|
Industrial steam generation
|
49,357
|
|
28,464
|
|
96,367
|
|
43,370
|
|
|
Eliminations
|
(13,001
|
)
|
(5,549
|
)
|
(34,121
|
)
|
(9,232
|
)
|
|
|
200,964
|
|
197,752
|
|
389,522
|
|
356,878
|
|
|
Vølund & Other Renewable segment
|
|
|
|
|
|
Renewable new build and services
|
31,553
|
|
40,077
|
|
61,086
|
|
84,788
|
|
|
Operations and maintenance services
|
2,313
|
|
14,925
|
|
2,873
|
|
30,172
|
|
|
Eliminations
|
(171
|
)
|
—
|
|
(732
|
)
|
—
|
|
|
|
33,695
|
|
55,002
|
|
63,227
|
|
114,960
|
|
|
SPIG segment
|
|
|
|
|
|
New build cooling systems
|
17,385
|
|
33,699
|
|
38,391
|
|
62,744
|
|
|
Aftermarket cooling system services
|
7,303
|
|
12,316
|
|
15,474
|
|
20,015
|
|
|
Eliminations
|
(1,854
|
)
|
—
|
|
(2,129
|
)
|
—
|
|
|
|
22,834
|
|
46,015
|
|
51,736
|
|
82,759
|
|
|
|
|
|
|
|
|
Eliminations
|
(9,378
|
)
|
(7,432
|
)
|
(24,434
|
)
|
(10,084
|
)
|
|
|
$
|
248,115
|
|
$
|
291,337
|
|
$
|
480,051
|
|
$
|
544,513
|
|
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 June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Gross profit (loss)
(1)
:
|
|
|
|
|
|
Babcock & Wilcox segment
|
$
|
37,853
|
|
$
|
30,013
|
|
$
|
68,959
|
|
$
|
60,876
|
|
|
Vølund & Other Renewable segment
|
5,057
|
|
(69,329
|
)
|
2,201
|
|
(119,778
|
)
|
|
SPIG segment
|
2,388
|
|
79
|
|
6,064
|
|
(2,672
|
)
|
|
Intangible amortization expense included in cost of operations
|
(1,014
|
)
|
(1,829
|
)
|
(2,071
|
)
|
(3,661
|
)
|
|
|
44,284
|
|
(41,066
|
)
|
75,153
|
|
(65,235
|
)
|
|
|
|
|
|
|
|
Selling, general and administrative ("SG&A") expenses
|
(41,948
|
)
|
(46,948
|
)
|
(84,217
|
)
|
(106,120
|
)
|
|
Advisory fees and settlement costs
|
(4,778
|
)
|
(5,142
|
)
|
(18,388
|
)
|
(8,231
|
)
|
|
Intangible amortization expense included in SG&A
|
(128
|
)
|
(158
|
)
|
(258
|
)
|
(395
|
)
|
|
Goodwill impairment
|
—
|
|
(37,540
|
)
|
—
|
|
(37,540
|
)
|
|
Restructuring activities and spin-off transaction costs
|
(936
|
)
|
(3,826
|
)
|
(7,015
|
)
|
(10,688
|
)
|
|
Research and development costs
|
(710
|
)
|
(1,287
|
)
|
(1,453
|
)
|
(2,429
|
)
|
|
Loss on asset disposals, net
|
(42
|
)
|
(1,384
|
)
|
(42
|
)
|
(1,384
|
)
|
|
Equity in income and impairment of investees
|
—
|
|
—
|
|
—
|
|
(11,757
|
)
|
|
Operating loss
|
$
|
(4,258
|
)
|
$
|
(137,351
|
)
|
$
|
(36,220
|
)
|
$
|
(243,779
|
)
|
(1)
Intangible amortization is not allocated to the segments' gross profit, but depreciation is allocated to the segments' gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
Babcock & Wilcox segment
(1)
|
$
|
19,032
|
|
$
|
9,897
|
|
$
|
27,996
|
|
$
|
14,074
|
|
|
Vølund & Other Renewable segment
|
(779
|
)
|
(78,603
|
)
|
(9,642
|
)
|
(140,357
|
)
|
|
SPIG segment
|
(142
|
)
|
(6,222
|
)
|
517
|
|
(13,532
|
)
|
|
Corporate
(2)
|
(9,367
|
)
|
(6,194
|
)
|
(14,351
|
)
|
(17,808
|
)
|
|
Research and development costs
|
(710
|
)
|
(1,287
|
)
|
(1,453
|
)
|
(2,429
|
)
|
|
|
8,034
|
|
(82,409
|
)
|
3,067
|
|
(160,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring activities and spin-off transaction costs
|
(936
|
)
|
(3,826
|
)
|
(7,015
|
)
|
(10,688
|
)
|
|
Financial advisory services
|
(3,197
|
)
|
(5,142
|
)
|
(7,155
|
)
|
(8,231
|
)
|
|
Settlement cost to exit Vølund contract
(3)
|
—
|
|
—
|
|
(6,575
|
)
|
—
|
|
|
Advisory fees for settlement costs and liquidity planning
|
(1,581
|
)
|
—
|
|
(4,658
|
)
|
—
|
|
|
Goodwill impairment
|
—
|
|
(37,540
|
)
|
—
|
|
(37,540
|
)
|
|
Impairment of equity method investment in TBWES
|
—
|
|
—
|
|
—
|
|
(18,362
|
)
|
|
Gain on sale of equity method investment in BWBC
|
—
|
|
—
|
|
—
|
|
6,509
|
|
|
Depreciation & amortization
|
(6,536
|
)
|
(6,921
|
)
|
(13,842
|
)
|
(13,902
|
)
|
|
Loss on asset disposal
|
(42
|
)
|
(1,513
|
)
|
(42
|
)
|
(1,513
|
)
|
|
Operating loss
|
(4,258
|
)
|
(137,351
|
)
|
(36,220
|
)
|
(243,779
|
)
|
|
Interest expense, net
|
(26,636
|
)
|
(11,770
|
)
|
(37,211
|
)
|
(25,069
|
)
|
|
Loss on debt extinguishment
|
(3,969
|
)
|
(49,241
|
)
|
(3,969
|
)
|
(49,241
|
)
|
|
Loss on sale of business
|
(3,601
|
)
|
—
|
|
(3,601
|
)
|
—
|
|
|
Net pension benefit before MTM
|
3,333
|
|
6,542
|
|
6,761
|
|
13,539
|
|
|
MTM (gain) loss from benefit plans
|
(862
|
)
|
544
|
|
(1,260
|
)
|
544
|
|
|
Foreign exchange
|
9,506
|
|
(20,198
|
)
|
(647
|
)
|
(17,741
|
)
|
|
Other – net
|
43
|
|
(131
|
)
|
463
|
|
266
|
|
|
Loss before income tax expense
|
(26,444
|
)
|
(211,605
|
)
|
(75,684
|
)
|
(321,481
|
)
|
|
Income tax expense (benefit)
|
1,891
|
|
(1,934
|
)
|
2,517
|
|
5,029
|
|
|
Loss from continuing operations
|
(28,335
|
)
|
(209,671
|
)
|
(78,201
|
)
|
(326,510
|
)
|
|
Gain (loss) from discontinued operations, net of tax
|
694
|
|
(55,932
|
)
|
694
|
|
(59,428
|
)
|
|
Net loss
|
(27,641
|
)
|
(265,603
|
)
|
(77,507
|
)
|
(385,938
|
)
|
|
Net income (loss) attributable to noncontrolling interest
|
1
|
|
(165
|
)
|
102
|
|
(263
|
)
|
|
Net loss attributable to stockholders
|
$
|
(27,640
|
)
|
$
|
(265,768
|
)
|
$
|
(77,405
|
)
|
$
|
(386,201
|
)
|
|
|
|
|
(1)
|
The Babcock & Wilcox segment adjusted EBITDA for the three and six months ended
June 30, 2018
excludes
$6.5 million
and
$13.5 million
, respectively, 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
and
$5.7 million
in the three months and six months ended
June 30, 2018
, respectively.
|
|
|
|
|
(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 4
– REVENUE RECOGNITION AND CONTRACTS
Adoption of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606")
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a
$0.5 million
net increase to opening retained earnings as of January 1, 2018 from the cumulative effect of adopting Topic 606 that primarily related to transitioning the timing of certain sales commissions expense. The effect on revenue from adopting Topic 606 was not material for the six months ended June 30, 2018.
Revenue Recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services primarily in the Babcock & Wilcox and SPIG segments, accounted for
18%
and
23%
of our revenue for the three months ended
June 30, 2019
and 2018, respectively, and
18%
and
23%
of our revenue for the
six months ended
June 30, 2019
and 2018, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon shipment or delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.
Revenue from products and services transferred to customers over time accounted for
82%
and
77%
of our revenue for the three months ended
June 30, 2019
and 2018, respectively, and
82%
and
77%
of our revenue for the
six months ended
June 30, 2019
and 2018, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all
three
of our segments. Typically, revenue is recognized over time using the percentage-of-completion method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the percentage-of-completion method contain a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position and have done so, particularly in our Vølund and Other Renewable segment. Refer to
Note 3
for our disaggregation of revenue by product line.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In many instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.
We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.
Contract Balances
The following represents the components of our
contracts in progress
and
advance billings on contracts
included in our Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
December 31, 2018
|
$ Change
|
% Change
|
|
Contract assets - included in contracts in progress:
|
|
|
|
|
|
Costs incurred less costs of revenue recognized
|
$
|
33,155
|
|
$
|
49,910
|
|
$
|
(16,755
|
)
|
(34
|
)%
|
|
Revenues recognized less billings to customers
|
117,267
|
|
94,817
|
|
22,450
|
|
24
|
%
|
|
Contracts in progress
|
$
|
150,422
|
|
$
|
144,727
|
|
$
|
5,695
|
|
4
|
%
|
|
Contract liabilities - included in advance billings on contracts:
|
|
|
|
|
|
Billings to customers less revenues recognized
|
$
|
99,317
|
|
$
|
140,933
|
|
$
|
(41,616
|
)
|
(30
|
)%
|
|
Costs of revenue recognized less cost incurred
|
2,967
|
|
8,434
|
|
(5,467
|
)
|
(65
|
)%
|
|
Advance billings on contracts
|
$
|
102,284
|
|
$
|
149,367
|
|
$
|
(47,083
|
)
|
(32
|
)%
|
|
|
|
|
|
|
|
Net contract balance
|
$
|
48,138
|
|
$
|
(4,640
|
)
|
$
|
52,778
|
|
(1,137
|
)%
|
|
|
|
|
|
|
|
Accrued contract losses
|
$
|
11,014
|
|
$
|
61,651
|
|
$
|
(50,637
|
)
|
(82
|
)%
|
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
June 30, 2019
we had
$585.0 million
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
37.6%
,
20.2%
and
42.2%
of our remaining performance obligations as revenue in the remainder of 2019, 2020 and thereafter, respectively.
Changes in Contract Estimates
In the
three and six
months ended
June 30, 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 June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Increases in gross profits for changes in estimates for over time contracts
|
$
|
8,088
|
|
$
|
6,019
|
|
$
|
15,894
|
|
$
|
13,946
|
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(16,051
|
)
|
(50,327
|
)
|
(23,728
|
)
|
(110,498
|
)
|
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
(7,963
|
)
|
$
|
(44,308
|
)
|
$
|
(7,834
|
)
|
$
|
(96,552
|
)
|
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
June 30, 2019
and 2018, we recorded
$3.2 million
and
$57.3 million
in net losses, respectively, inclusive of warranty expense as described in
Note 10
, resulting from changes in the estimated revenues and costs to complete the
six
European Vølund EPC loss contracts. In the three months ended
June 30, 2019
, we reduced our estimate of liquidated damages on these contracts by
$0.4 million
. These changes in estimates in the three months ended June 30, 2018 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these six contracts by
$3.1 million
.
In the
six months ended
June 30, 2019
and 2018, we recorded
$7.4 million
and
$110.0 million
in net losses, respectively, inclusive of warranty expense as described in
Note 10
, resulting from changes in the estimated revenues and costs to complete the
six
European Vølund EPC loss contracts. In the six months ended
June 30, 2019
, we reduced our estimate of liquidated damages on these contracts by
$0.4 million
. These changes in estimates in the
six months ended
June 30, 2018
included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these
six
contracts by
$16.3 million
. Total anticipated liquidated damages associated with these six contracts were
$88.2 million
and
$93.4 million
at
June 30, 2019
and
June 30, 2018
, respectively.
As of June 30, 2019, five of the six European Vølund EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the
March 29, 2019
settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying 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 May 31, 2019, 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.
For the second loss project, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant.
As of
June 30, 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
June 30, 2019
, this contract was approximately
97%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. 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
three and six
months ended
June 30, 2019
, we recognized additional contract losses of
$2.0 million
on this contract as a result of identifying additional remediation costs in the second quarter of 2019. Our estimate at completion as of
June 30, 2019
includes
$9.1 million
of total expected liquidated damages. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$3.2 million
. In the
three and six
months ended
June 30, 2018
, we recognized additional contract losses of
$8.3 million
and
$15.3 million
, respectively, as a result of differences in actual and estimated costs, schedule delays, issues encountered during trial operations and increases in expected warranty costs. As of
June 30, 2018
, this contract had
$3.1 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
June 30, 2019
, this contract was approximately
100%
complete. Trial operations began in April 2019 and takeover by the customer occurred effective May 2019. This project is subject to the
March 29, 2019
settlement agreement described above. During the
three and six
months ended
June 30, 2019
, we recognized additional contract losses of
$1.2 million
and
$1.9 million
, respectively, on this contract as a result of repairs required during startup commissioning activities, additional punch list and other commissioning costs, and changes in construction cost estimates. Our estimate at completion as of
June 30, 2019
includes
$19.1 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
June 30, 2019
and 2018 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$0.1 million
. In the
three and six
months ended
June 30, 2018
, we recognized contract losses of
$9.3 million
and
$13.4 million
, respectively, on this contract as a result of repairs required during startup commissioning activities in the second quarter of 2018, increases in expected warranty costs, changes in construction cost estimates, subcontractor productivity being lower than previous estimates, and additional expected punch list and other commissioning costs. As of
June 30, 2018
, this contract had
$10.6 million
of accrued losses and was
86%
complete.
The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of
June 30, 2019
, this contract was approximately
100%
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 and six
ended
June 30, 2019
, we did
no
t recognize additional charges on the contract. Our estimate at completion as of
June 30, 2019
includes
$6.7 million
of total expected liquidated damages due to schedule delays. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$0.1 million
. In the
three and six
months ended
June 30, 2018
, we recognized charges of
$1.6 million
and
$3.5 million
, respectively, from changes in our estimate at completion, and as of
June 30, 2018
, this contract had
$0.5 million
of accrued losses and was
99%
complete.
The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
June 30, 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 and six
months ended
June 30, 2019
, we recognized additional contract charges of
$4.0 million
and
$4.3 million
, respectively, on this contract due to changes in estimated bonus revenue and cost to complete remaining punch list, remediation of certain performance guarantees and other close out items. Our estimate at completion as of
June 30, 2019
includes
$20.7 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
June 30, 2019
also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$0.4 million
. In the
three and six
months ended
June 30, 2018
, we recognized contract losses of
$12.8 million
and
$24.8 million
, respectively, on this contract as a result of changes in the expected selling price, changes in construction cost estimates and schedule delays, and as of
June 30, 2018
, this contract had
$6.3 million
of accrued losses and was
88%
complete.
The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
June 30, 2019
, this contract was approximately
97%
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 construction support services to complete certain key systems of the plant by May 31, 2019. The settlement also eliminates all historical claims and remaining liquidated damages. Remaining items at June 30, 2019 are primarily related to punch list and other finalization items for the key systems under the terms of the settlement and subcontract close outs. During the three months ended
June 30, 2019
, our estimated loss on the contract improved by
$4.0 million
inclusive of warranty. During the six months ended
June 30, 2019
, our estimated loss on the contract improved by
$1.8 million
inclusive of warranty. Our estimate at completion as of
June 30, 2019
, includes
$13.6 million
of total expected liquidated damages due to schedule delays. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$5.3 million
. In the
three and six
months ended
June 30, 2018
, we recognized charges of
$21.4 million
and
$39.7 million
, respectively, from changes in our estimate at completion, and as of
June 30, 2018
, this contract had
$29.0 million
of accrued losses and was
62%
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
June 30, 2019
, this contract was approximately
99%
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 and six
months ended
June 30, 2019
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract charges of
$0.1 million
and
$0.9 million
, respectively related to matters encountered in completing punch list items. Our estimate at completion as of
June 30, 2019
includes
$19.0 million
of total expected liquidated damages due to schedule delays. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$0.2 million
. In the
three and six
months ended
June 30, 2018
, we recognized additional contract losses of
$3.9 million
and
$13.3 million
, respectively, as a result of changes in our estimate at completion, and as of
June 30, 2018
, this contract had
$2.6 million
of accrued losses and was
87%
complete.
During the
three and six
months ended
June 30, 2019
, we recognized additional charges of
$1.3 million
and
$1.5 million
, respectively, on our other Vølund renewable energy projects that are not loss contracts. During the
three and six
months
ended
June 30, 2018
, we did
no
t recognize additional losses on our other Vølund renewable energy projects that are not loss contracts.
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
June 30, 2019
estimated losses at completion for these three contracts. We are continuing to aggressively pursue recovery of this cost under various applicable insurance policies and from responsible subcontractors. In June 2019, we agreed in principle to a settlement agreement under one insurance policy related to recover GBP
2.8 million
(
$3.5 million
) of certain losses on the fifth project; we also recorded this recovery in
accounts receivable - other
in our Condensed Consolidated Balance Sheet as of June 30, 2019.
During the third quarter of 2016, we claimed 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 continued to aggressively pursue full recovery under the policy, and we filed for arbitration in July 2018. On June 28, 2019, we agreed to a full settlement, under which our insurer paid DKK
37 million
(
$5.6 million
) to us in July 2019. As of December 31, 2018 and March 31, 2019, we had net receivable of DKK
20.0 million
(
$3.2 million
), which was increased to DKK
37 million
(
$5.6 million
) as of June 30, 2019 in
accounts receivable - other
in our Condensed Consolidated Balance Sheets.
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
(approximately
$6.6 million
) payment on April 5, 2019 for the
settlement eliminates our obligations and our risk related to acting as the prime EPC should the project have moved forward.
SPIG U.S. Loss Contract
At June 30, 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
June 30, 2019
, the design and procurement are substantially complete, and construction is nearing completion. Overall, the contract is
97%
complete and it is expected be fully complete in mid-2019. As of
June 30, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Condensed Consolidated Balance Sheets was
$0.5 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 5
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
December 31, 2018
|
|
Raw materials and supplies
|
$
|
45,931
|
|
$
|
44,833
|
|
|
Work in progress
|
6,142
|
|
5,348
|
|
|
Finished goods
|
11,755
|
|
11,142
|
|
|
Total inventories
|
$
|
63,828
|
|
$
|
61,323
|
|
NOTE 6
– PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment less accumulated depreciation is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
December 31, 2018
|
|
Land
|
$
|
3,568
|
|
$
|
3,575
|
|
|
Buildings
|
106,182
|
|
106,238
|
|
|
Machinery and equipment
|
176,928
|
|
181,825
|
|
|
Property under construction
|
2,381
|
|
2,290
|
|
|
|
289,059
|
|
293,928
|
|
|
Less accumulated depreciation
|
211,054
|
|
203,036
|
|
|
Net property, plant and equipment
|
$
|
78,005
|
|
$
|
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. The move to the new, leased office space is expected to occur during the fourth 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
and
$4.0 million
was recognized during the three and six months ended June 30, 2019, respectively, and
$7.3 million
has been recognized cumulatively, since the decision to relocate in the third quarter of 2018.
NOTE 7
- GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of June 30, 2019:
|
|
|
|
|
|
|
|
(in thousands)
|
Babcock & Wilcox
|
|
Balance at December 31, 2018
|
$
|
47,108
|
|
|
Currency translation adjustments
|
5
|
|
|
Balance at June 30, 2019
|
$
|
47,113
|
|
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. All of our remaining goodwill is related to the Babcock & Wilcox reporting unit in the Babcock & Wilcox segment. 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 six months ended June 30, 2019. In the three and six months ended June 30, 2018, we recognized
$37.5 million
impairment of all the remaining goodwill in the SPIG reporting unit resulting from a reduction in their bookings than previously forecasted.
NOTE 8
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
December 31, 2018
|
|
Definite-lived intangible assets
|
|
|
|
Customer relationships
|
$
|
24,544
|
|
$
|
24,764
|
|
|
Unpatented technology
|
15,098
|
|
15,098
|
|
|
Patented technology
|
2,611
|
|
2,616
|
|
|
Tradename
|
12,514
|
|
12,566
|
|
|
All other
|
9,938
|
|
9,728
|
|
|
Gross value of definite-lived intangible assets
|
64,705
|
|
64,772
|
|
|
Customer relationships amortization
|
(17,968
|
)
|
(17,219
|
)
|
|
Unpatented technology amortization
|
(4,507
|
)
|
(3,760
|
)
|
|
Patented technology amortization
|
(2,412
|
)
|
(2,348
|
)
|
|
Tradename amortization
|
(3,968
|
)
|
(3,672
|
)
|
|
All other amortization
|
(8,760
|
)
|
(8,285
|
)
|
|
Accumulated amortization
|
(37,615
|
)
|
(35,284
|
)
|
|
Net definite-lived intangible assets
|
$
|
27,090
|
|
$
|
29,488
|
|
|
Indefinite-lived intangible assets
|
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
|
Total intangible assets, net
|
$
|
28,395
|
|
$
|
30,793
|
|
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
|
Balance at beginning of period
|
$
|
30,793
|
|
$
|
42,065
|
|
|
Amortization expense
|
(2,331
|
)
|
(4,056
|
)
|
|
Currency translation adjustments and other
|
(67
|
)
|
(1,641
|
)
|
|
Balance at end of the period
|
$
|
28,395
|
|
$
|
36,368
|
|
Amortization of intangible assets is included in
cost of operations
and
SG&A
in our Condensed Consolidated Statement of Operations but is not allocated to segment results.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amortization Expense
|
|
Three months ending September 30, 2019
|
$
|
940
|
|
|
Three months ending December 31, 2019
|
940
|
|
|
Twelve months ending December 31, 2020
|
3,487
|
|
|
Twelve months ending December 31, 2021
|
3,261
|
|
|
Twelve months ending December 31, 2022
|
3,200
|
|
|
Twelve months ending December 31, 2023
|
3,197
|
|
|
Twelve months ending December 31, 2024
|
3,085
|
|
|
Thereafter
|
8,980
|
|
NOTE 9
– 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 27
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, which we recognize 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.
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. The move to the new, leased office space is expected to occur during the fourth quarter of 2019. As of June 30, 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 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:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended June 30, 2019
|
Six months ended June 30, 2019
|
|
Operating lease expense
|
$
|
1,589
|
|
$
|
3,498
|
|
|
Short-term lease expense
|
2,335
|
|
5,196
|
|
|
Variable lease expense
|
871
|
|
983
|
|
|
Sublease income
(1)
|
(14
|
)
|
(24
|
)
|
|
Total lease expense
|
$
|
4,781
|
|
$
|
9,653
|
|
(1)
Sublease income excludes rental income from owned properties, which is not material.
Other information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended June 30, 2019
|
Six months ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from leases
|
$
|
1,560
|
|
$
|
3,661
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
|
Operating leases
|
$
|
812
|
|
$
|
1,013
|
|
Amounts relating to leases were presented in the Condensed Consolidated Balance Sheets as of June 30, 2019 in the following line items:
|
|
|
|
|
|
|
|
(in thousands, except lease term and discount rate)
|
June 30, 2019
|
|
Right-of-use assets
|
$
|
13,121
|
|
|
|
|
|
Liabilities:
|
|
|
Lease liabilities
|
$
|
4,229
|
|
|
Noncurrent lease liabilities
|
8,816
|
|
|
Total lease liabilities
|
$
|
13,045
|
|
|
|
|
|
Weighted-average remaining lease term:
|
|
|
Operating leases (in years)
|
3.61
|
|
|
Weighted-average discount rate:
|
|
|
|
Operating leases
|
9.47
|
%
|
Future minimum lease payments required under non-cancellable operating leases as of June 30, 2019 were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Six months ending December 31, 2019
|
$
|
2,702
|
|
|
Twelve months ending December 31, 2020
|
4,774
|
|
|
Twelve months ending December 31, 2021
|
3,332
|
|
|
Twelve months ending December 31, 2022
|
2,155
|
|
|
Twelve months ending December 31, 2023
|
1,417
|
|
|
Thereafter
|
899
|
|
|
Total
|
$
|
15,279
|
|
|
Less imputed interest
|
(2,234
|
)
|
|
Lease liability
|
$
|
13,045
|
|
NOTE 10
– ACCRUED 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
|
Balance at beginning of period
|
$
|
45,117
|
|
$
|
33,514
|
|
|
Additions
|
2,717
|
|
28,008
|
|
|
Expirations and other changes
|
(4,412
|
)
|
(1,592
|
)
|
|
Payments
|
(3,641
|
)
|
(5,791
|
)
|
|
Translation and other
|
(192
|
)
|
(1,001
|
)
|
|
Balance at end of period
|
$
|
39,589
|
|
$
|
53,138
|
|
We accrue estimated expense included in cost of operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Warranty expense in the three and six months ended June 30, 2019 includes
$3.9 million
of warranty reversal related to developments in the quarter stemming from the March 29, 2019 settlement agreement for the Vølund EPC contracts described in
Note 4
. Warranty expense for the six months ended June 30, 2018, includes a $
15.1 million
increase in expected warranty costs for the
six
European renewable energy loss contracts based on experience from the startup and commissioning activities in the second quarter of 2018 and $
5.3 million
of specific provisions on certain contracts in the Babcock & Wilcox segment for specific technical matters and customer requirements.
NOTE 11
– 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 June 30, 2019
|
Total severance and related costs
|
|
Babcock & Wilcox segment
|
$
|
127
|
|
|
Vølund & Other Renewable segment
|
437
|
|
|
SPIG segment
|
258
|
|
|
Corporate
|
114
|
|
|
|
$
|
936
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Six months ended June 30, 2019
|
Total severance and related costs
|
|
Babcock & Wilcox segment
|
$
|
4,075
|
|
|
Vølund & Other Renewable segment
|
1,015
|
|
|
SPIG segment
|
401
|
|
|
Corporate
|
1,524
|
|
|
|
$
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Three months ended June 30, 2018
|
Severance and related costs
|
Exit costs
|
Spin-off transaction costs
|
Total
|
|
Babcock & Wilcox segment
|
$
|
2,768
|
|
$
|
6
|
|
$
|
—
|
|
$
|
2,774
|
|
|
Vølund & Other Renewable segment
|
(53
|
)
|
—
|
|
—
|
|
(53
|
)
|
|
SPIG segment
|
366
|
|
—
|
|
—
|
|
366
|
|
|
Corporate
|
785
|
|
—
|
|
(46
|
)
|
739
|
|
|
|
$
|
3,866
|
|
$
|
6
|
|
$
|
(46
|
)
|
$
|
3,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Six months ended June 30, 2018
|
Severance and related costs
|
Exit costs
|
Spin-off transaction costs
|
Total
|
|
Babcock & Wilcox segment
|
$
|
3,860
|
|
$
|
150
|
|
$
|
—
|
|
$
|
4,010
|
|
|
Vølund & Other Renewable segment
|
441
|
|
—
|
|
—
|
|
441
|
|
|
SPIG segment
|
750
|
|
—
|
|
—
|
|
750
|
|
|
Corporate
|
5,157
|
|
—
|
|
330
|
|
5,487
|
|
|
|
$
|
10,208
|
|
$
|
150
|
|
$
|
330
|
|
$
|
10,688
|
|
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, the level of activity in our Vølund business and our liquidity needs. Severance expense is recognized over the remaining service periods of affected employees, and as of
June 30, 2019
,
$0.7 million
of total severance expense is remaining to be recognized based on actions taken through that date.
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 June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Balance at beginning of period
|
10,196
|
|
5,914
|
|
$
|
7,359
|
|
$
|
2,320
|
|
|
Restructuring expense
|
936
|
|
4,276
|
|
7,015
|
|
10,164
|
|
|
Payments
|
(4,158
|
)
|
(2,308
|
)
|
(7,400
|
)
|
(4,602
|
)
|
|
Balance at June 30
|
$
|
6,974
|
|
$
|
7,882
|
|
$
|
6,974
|
|
$
|
7,882
|
|
Accrued restructuring liabilities at
June 30, 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 and six months ended June 30, 2018, we recognized
$0.2 million
and
$0.4 million
, respectively, in non-cash restructuring expense related to losses on the disposals of long-lived assets.
NOTE 12
– 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 June 30,
|
Six months ended June 30,
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
2019
|
2018
|
2019
|
2018
|
|
Interest cost
|
$
|
10,965
|
|
$
|
9,741
|
|
$
|
21,822
|
|
$
|
19,498
|
|
|
$
|
119
|
|
$
|
95
|
|
$
|
239
|
|
$
|
192
|
|
|
Expected return on plan assets
|
(13,905
|
)
|
(16,215
|
)
|
(27,799
|
)
|
(32,445
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Amortization of prior service cost
|
27
|
|
25
|
|
55
|
|
50
|
|
|
(539
|
)
|
(188
|
)
|
(1,078
|
)
|
(834
|
)
|
|
Recognized net actuarial loss (gain)
|
862
|
|
(544
|
)
|
1,260
|
|
(544
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Benefit plans, net
(1)
|
(2,051
|
)
|
(6,993
|
)
|
(4,662
|
)
|
(13,441
|
)
|
|
(420
|
)
|
(93
|
)
|
(839
|
)
|
(642
|
)
|
|
Service cost included in COS
(2)
|
150
|
|
187
|
|
300
|
|
376
|
|
|
4
|
|
4
|
|
8
|
|
8
|
|
|
Net periodic benefit (benefit) cost
|
$
|
(1,901
|
)
|
$
|
(6,806
|
)
|
$
|
(4,362
|
)
|
$
|
(13,065
|
)
|
|
$
|
(416
|
)
|
$
|
(89
|
)
|
$
|
(831
|
)
|
$
|
(634
|
)
|
|
|
|
|
(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.
|
Settlements are triggered in a plan when the distributions exceed the sum of the service cost and interest cost of the respective plan. Lump sum payments from our Canadian Plans resulted in plan settlements during the first and second quarters of 2019. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities that were losses of
$0.9 million
and
$1.3 million
in the three and six months ended June 30, 2019, respectively. Both the settlements and the MTM remeasurements are reflected in the
Recognized net actuarial loss (gain)
in the table above and are included in our Condensed Consolidated Statements of Operations in the
Benefit plans, net
line item.
During the second quarter of 2018, lump sum payments from our Canadian pension plan resulted in a plan settlement gain of
$0.1 million
, which also resulted in interim mark to market accounting for the pension plan. The mark to market adjustment in the second quarter of 2018 was a gain of
$0.4 million
. The effect of these charges and mark to market adjustments are reflected in the
Recognized net actuarial loss (gain)
in the table above. The recognized net actuarial (gain) loss was recorded in our Condensed Consolidated Statements of Operations in the
Benefit plans, net
line item. There were no lump sum payments from our Canadian pension plan during the first quarter of 2018.
We made contributions to our pension and other postretirement benefit plans totaling
$1.4 million
and
$2.8 million
during the three and six months ended June 30, 2019, respectively, as compared to
$4.7 million
and
$8.5 million
during the three and six months ended June 30, 2018, respectively.
Expected employer contributions to the U.S. Pension Plan assume that relief is granted 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 or early in 2020, 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 and a similar or greater amount in 2020, each plus interest and, if assessed, penalties.
NOTE 13
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
December 31, 2018
|
|
United States
|
$
|
184,400
|
|
$
|
144,900
|
|
|
Foreign
|
—
|
|
606
|
|
|
Total revolving debt
|
$
|
184,400
|
|
$
|
145,506
|
|
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 June 30, 2019, we were in compliance with the terms of the Amended Credit Agreement inclusive of Amendments No. 16 and No. 17. 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 14
and (ii) an incremental uncommitted facility of up to
$15.0 million
, to be provided by B. Riley or an assignee. 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 14
and (ii) an incremental uncommitted facility of up to
$15.0 million
, to be provided by B. Riley or an assignee. On August 7, 2019, we entered into Amendment No. 17 to the Amended Credit Agreement, which clarifies the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts and resets the loss basket for certain Vølund contracts to
$15.0 million
to align with the clarification commencing with the quarter ending March 31, 2019.
Amendment No. 16 to the Amended Credit Agreement also created a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, which effectively accelerated the maturity date of the U.S. Revolving Credit Facility from June 30, 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
(reduced to
$340.0 million
in July 2019 as a result of the Loibl divestiture described in
Note 25
), 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.
The Amended Credit Agreement and our 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 18
; 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 June 30, 2019, revolving loans outstanding under the U.S. Revolving Credit Facility bear interest at our option at either (1) the LIBOR rate plus
6.0%
per annum during 2019 and
7.0%
per annum during 2020, or (2) the Base Rate plus
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 19
. 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 paid on the first business day of 2019, and a pro-rated amount is payable on the first business day of 2020. A deferred fee reduction from
2.5%
to
1.5%
became 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.
In connection with Amendment No. 16, a contingent consent fee of
$13.9 million
(
4.0%
of total availability) is payable on December 15, 2019, but will be waived if certain actions are undertaken to refinance the facility by that date. We recorded the contingent consent fee as part of deferred financing fees in
other current assets
in the Condensed Consolidated Balance Sheets because it has been earned but may be waived, and it is being amortized to interest expense. See further discussion in
Note 19
. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of
1.0%
of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019. No expense has been recognized for the deferred ticking fee because the company believes it is not probable of being earned by the lenders.
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 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 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 covenant 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) creates a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, (9) establishes a deferred ticking fee of
1.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019 and (10) provides for a contingent consent fee of
4.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019. Amendment No. 17, among other items, (1) clarifies from Amendment No. 16 the definition of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and (2) resets the loss basket for certain Vølund contracts to
$15.0 million
to align with the clarification commencing with the quarter ending March 31, 2019.
Effective beginning April 5, 2019 with Amendment No. 16, the remaining maximum permitted senior debt leverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
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
Effective beginning April 5, 2019 with Amendment No. 16, the remaining minimum consolidated interest coverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
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
June 30, 2019
, borrowings under the U.S. Revolving Credit Facility consisted of
$184.4 million
at a weighted average interest rate of
9.13%
. Usage under the U.S. Revolving Credit Facility consisted of
$184.4 million
of borrowings,
$29.2 million
of financial letters of credit and
$114.8 million
of performance letters of credit. At
June 30, 2019
, we had approximately
$18.6 million
available for borrowings or to meet letter of credit requirements primarily based on our overall facility size and our borrowing sublimit. The closing of the Loibl sale in June 2019 increased our borrowing capacity by
$8.5 million
due to the release of a performance letter of credit, effective June 24, 2019. In July 2019, the U.S. Revolving Credit Facility was reduced by
$7.0 million
due to the sale of Loibl, in accordance with the terms of the Amended Credit Agreement.
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 be denominated in Turkish liras instead of euros, 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
June 30, 2019
and December 31, 2018 was
$129.2 million
and
$175.9 million
, respectively. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping letters of credit or bank guarantees was
$31.3 million
as of
June 30, 2019
. Of the letters of credit issued under the U.S. Revolving Credit Facility,
$28.5 million
are subject to foreign currency revaluation.
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
June 30, 2019
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$215.1 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping 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 14
– LAST OUT TERM LOANS
The components of the Last Out Term Loans by Tranche are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
(in thousands)
|
A-1
|
A-2
|
A-3
|
Total
|
|
Proceeds
(1)
|
$
|
37,256
|
|
$
|
10,000
|
|
$
|
141,350
|
|
$
|
188,606
|
|
|
Discount and fees
|
—
|
|
—
|
|
8,650
|
|
8,650
|
|
|
Paid-in-kind interest
|
696
|
|
257
|
|
2,800
|
|
3,753
|
|
|
Principal
|
37,952
|
|
10,257
|
|
152,800
|
|
201,009
|
|
|
Unamortized discount and fees
|
(14
|
)
|
—
|
|
(17,939
|
)
|
(17,953
|
)
|
|
Net debt balance
|
$
|
37,938
|
|
$
|
10,257
|
|
$
|
134,861
|
|
$
|
183,056
|
|
(1)
Tranche A-1 proceeds represent the estimated fair value of the tranche as of April 5, 2019, the date it was modified as discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
(in thousands)
|
A-1
|
A-2
|
A-3
|
Total
|
|
Proceeds
|
$
|
30,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
30,000
|
|
|
Discount and fees
|
5,111
|
|
—
|
|
—
|
|
5,111
|
|
|
Paid-in-kind interest
|
132
|
|
—
|
|
—
|
|
132
|
|
|
Principal
|
35,243
|
|
—
|
|
—
|
|
35,243
|
|
|
Unamortized discount and fees
|
(4,594
|
)
|
—
|
|
—
|
|
(4,594
|
)
|
|
Net debt balance
|
$
|
30,649
|
|
$
|
—
|
|
$
|
—
|
|
$
|
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 Term Loans are subject to the same representations and warranties, covenants and events of default under the Amended Credit Agreement. In connection with Amendment No. 16, the maturity date for all Last Out Term Loans was extended to December 31, 2020. As of
June 30, 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).
As of June 30, 2019, after giving effect to Amendment No. 16, 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. Upon completion of the 2019 Rights Offering (as defined below) on July 23, 2019, the interest rate on all outstanding Last Out Term Loans under the Amended Credit Agreement became a fixed rate per annum of
12%
payable in cash. The total effective interest rate of Tranche A-1 was
15.98%
and
25.38%
on June 30, 2019 and December 31, 2018, respectively. Interest expense associated with the Last Out Term Loans is detailed in
Note 19
. Amendment No. 16 also permitted prepayment of up to
$86.0 million
of the Last Out Term Loans as contemplated under the Equitization Transactions described in
Note 18
.
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. In November 2018, Tranche A-1 was assigned to Vintage Capital Management, LLC ("Vintage"), also a related party, who held the full amount of Tranche A-1 at June 30, 2019. The original 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%
for each draw under Tranche A-1.
On April 5, 2019, Amendment No. 16 and the Letter Agreement (defined in
Note 18
) modified Tranche A-1 by adding a substantive conversion option that required the conversion of the Tranche A-1 to common stock at
$0.30
per share in connection with the Equitization Transactions described in
Note 18
, which was conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. Under U.S. GAAP, a debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The carrying value of the Tranche A-1 was
$33.3 million
on April 5, 2019 before the modification. The initial fair value of the new debt was estimated to be its initial principal value of
$37.3 million
. We recognized a loss on debt extinguishment of
$4.0 million
in the quarter ended June 30, 2019, primarily representing the unamortized value of the original issuance discount and fees on the extinguished debt.
As of June 30, 2019, Tranche A-1 was payable in full on December 31, 2020, the maturity date. Tranche A-1 may be prepaid, subject to the subordination provisions, but not re-borrowed. As described in
Note 18
, Tranche A-1 was exchanged for shares on July 23, 2019, after which no remaining amounts were outstanding.
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
of net proceeds from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. Interest rates were adjusted with Amendment No. 16 as described above. The total effective interest rate of Tranche A-2 was
15.93%
on June 30, 2019. As of June 30, 2019, Tranche A-2 was payable in full on December 31, 2020 and may be prepaid, subject to the subordination provisions, but not re-borrowed. Interest rates of Tranche A-2 are described above. As described in
Note 18
, Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions.
Tranche A-3
Under Amendment No. 16, we borrowed
$150.0 million
face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The
$141.4 million
net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in
Note 4
, 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. An additional discount was recorded upon shareholder approval of the warrants and Equitization Transactions. These additional discounts totaled
$8.1 million
, which included
$6.1 million
for the estimated fair value of warrants issued to B. Riley, a related party, as described in
Note 15
and
Note 18
and
$2.0 million
for the intrinsic value of the beneficial conversion feature that allows conversion of a portion of the Tranche A-3 to equity under the Backstop Commitment described in
Note 18
. Both the warrants and the Backstop Commitment were contemplated in connection of the original extension of Tranche A-3.
Interest rates for Tranche A-3 are described above. The total effective interest rate of Tranche A-3 was
23.79%
on June 30, 2019. Tranche A-3 may be prepaid, subject to the subordination provisions and as contemplated under the Equitization
Transactions as described above and in
Note 18
, but not re-borrowed. As part of the July 23, 2019 Equitization Transactions described in
Note 18
, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was
$39.7 million
inclusive of the
$8.2 million
of principal value exchanged for common shares under the Backstop Commitment.
Immediately after completion of the Equitization Transactions, the Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and
$114.0 million
including accrued paid-in-kind interest was outstanding on Tranche A-3, and it bears interest at a fixed rate of
12.0%
per annum payable in cash.
NOTE 15
– WARRANTS
On July 23, 2019,
16,666,667
warrants were issued to certain entities affiliated with B. Riley in connection with the Equitization Transactions described in
Note 18
. Each warrant was to purchase one share of our common stock at an exercise price of
$0.01
per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in
Note 1
, which adjusted the number of warrants to
1,666,666
and the exercise price remained
$0.01
per share.
The warrants were contemplated in the April 5, 2019 Letter Agreement (defined in
Note 18
) and on June 14, 2019, the issuance of the warrants was approved by stockholders in the Company's annual stockholder meeting, which established the grant date for accounting purposes. The grant date fair value of the warrants was estimated to be
$6.1 million
using the Black-Scholes option pricing model. The warrants may not be put back to the Company for cash, and they qualify for equity classification. The grant date value of the warrants was included as part of the original-issue discount based on the relative fair value method for Tranche A-3 of the Last Out Term Loans described in
Note 14
because the value was part of the consideration required by the Tranche A-3 lender in order to extend the Tranche A-3 loans.
The Black-Scholes option pricing model key assumptions are as follows:
|
|
|
|
|
|
|
|
Stock price
|
$
|
0.385
|
|
|
Exercise price
|
$
|
0.010
|
|
|
Time to expiration
|
3 years
|
|
|
Annualized volatility
|
121.00
|
%
|
|
Annual rate of quarterly dividends
|
—
|
%
|
|
Discount rate - bond equivalent rate
|
2.30
|
%
|
|
Expiration of option
|
April 5, 2022
|
|
|
Warrant value
|
$
|
0.38
|
|
NOTE 16
– COMMON SHARES
On June 14, 2019, after approval of the stockholders at the Company's annual meeting of stockholders, the Company amended its Amended and Restated Certificate of Incorporation to increase the authorized number of shares of the Company's common stock from
200,000,000
shares to
500,000,000
shares to allow for the Equitization Transactions described in
Note 18
. The reverse stock split on July 24, 2019, described in
Note 1
did not affect the number of authorized shares.
On June 14, 2019, at the Company's annual meeting of stockholders, upon the recommendation of the Company's Board of Directors, the stockholders approved the Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (amended and restated as of June 14, 2019) (the "Fourth Amended and Restated 2015 LTIP"), which became effective upon such stockholder approval. The Fourth Amended and Restated 2015 LTIP, among other immaterial changes, increases the number of shares available for awards by
17,000,000
shares to a total of
29,271,731
shares of the Company's common stock, subject to adjustment as provided under the plan document. The increase in the maximum number of shares available for awards will allow us to establish the previously announced equity pool of
16,666,666
shares of its common stock for issuance for long-term incentive planning purposes. The shares available for award under the plan are subject to equitable adjustment for the reverse stock split described in
Note 1
and other dilutive and antidilutive events.
NOTE 17
– RIGHTS OFFERINGS
2019 Rights Offering - Subsequent Event
On June 28, 2019, we distributed to holders of our common stock one nontransferable subscription right to purchase
0.986896
common shares for each common share held as of 5:00 p.m., New York City time, on June 27, 2019 at a subscription price of
$0.30
per whole share of common stock (the "2019 Rights Offering"). The 2019 Rights Offering expired at 5:00 p.m., New York City time, on July 18, 2019, and settled on July 23, 2019. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2019 Rights Offering did not include an oversubscription privilege. Direct costs of the 2019 Rights Offering totaled
$0.7 million
for the three and six months ended June 30, 2019.
The 2019 Rights Offering resulted in the issuance of
139.3 million
common shares (
13.9 million
common shares after the reverse stock split) as a result of the exercise of subscription rights in the offering. Gross proceeds from the 2019 Rights Offering were
$41.8 million
,
$10.3 million
which was used to fully repay Tranche A-2 of the Last Out Term Loans and the remaining
$31.5 million
was used to reduce outstanding borrowings under Tranche A-3 of the Last Out Term Loans. Concurrently with the closing of the 2019 Rights Offering, and in satisfaction of the Backstop Commitment as described in
Note 18
, the Company issued an aggregate of
27.4 million
common shares (
2.7 million
common shares after the reverse stock split) in exchange for a portion of the Tranche A-3 Last Out Term Loans totaling
$8.2 million
, to B. Riley, a related party, as described in
Note 24
. The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization Transactions described in
Note 18
and were approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.
2018 Rights Offering
On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase
1.4 million
common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of
$3.00
per common share (the "2018 Rights Offering"). 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 million
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 resulted in the issuance of
124.3 million
common shares (
12.4 million
common shares after the reverse stock split) 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
. The shares issued in the 2018 Rights Offering were then subject to the one-for-ten reverse stock split described in
Note 1
.
NOTE 18
– EQUITIZATION TRANSACTIONS
In connection with Amendment No. 16 to the Amended Credit Agreement and the extension of Tranche A-3 of the 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, stockholder approval. Stockholder approval was received at the Company's annual stockholder meeting on June 14, 2019 and the contemplated transactions (the "Equitization Transactions") occurred on July 23, 2019. The Equitization Transactions included:
|
|
|
|
•
|
A
$50.0 million
rights offering ("2019 Rights Offering") as described in
Note 17
, for which B. Riley FBR, Inc. agreed to act as a backstop, by purchasing from us, at a price of
$0.30
per share, all unsubscribed shares in the 2019 Rights Offering for cash or by exchanging an equal principal amount of outstanding Tranche A-2 or Tranche A-3 Last Out Term Loans (the "Backstop Commitment"). Under the 2019 Rights Offering,
166,666,667
shares of common stock were issued (
16,666,666
shares of common stock after the reverse stock split), of which
125,891,701
shares (
12,589,170
shares after the reverse stock split) were purchased through the exercise of rights in the rights offering generating
$37.8 million
of cash,
13,333,333
shares (
1,333,333
shares after the reverse stock split) were issued through assigned portions of the Backstop Commitment generating an additional
$4.0 million
of cash, and the final
27,441,633
shares (
2,744,163
shares after the reverse split) were exchanged for
$8.2 million
of principal value
|
including accrued paid-in-kind interest of Tranche A-3 Last Out Term Loans. Shares issued in the 2019 Rights Offering and under the Backstop Commitment were then subject to the one-for-ten reverse stock split described in
Note 1
and
Note 16
.
|
|
|
|
•
|
$10.3 million
of the proceeds of 2019 Rights Offering were used to fully repay Tranche A-2 of the Last Out Term Loans including accrued paid-in-kind interest.
|
|
|
|
|
•
|
$31.5 million
of the proceeds of the 2019 Rights Offering were used to partially prepay Tranche A-3 of the Last Out Term Loans including paid-in-kind interest. The total prepayment of principal of Tranche A-3 of the Last Out Term Loans was
$39.7 million
inclusive of the
$8.2 million
of principal value exchanged for common shares under the Backstop Commitment described above.
|
|
|
|
|
•
|
All
$38.2 million
of outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest was exchanged for
127,207,856
shares (
12,720,785
shares after the reverse stock split) of common stock (
107,207,856
shares (
10,720,785
shares after the reverse stock split) to Vintage and
20,000,000
shares (
2,000,000
shares after the reverse stock split) to affiliates of B. Riley) at a price of
$0.30
per share (the "Debt Exchange"). Prior to the Debt Exchange,
$6.0 million
of Tranche A-1 was held by affiliates of B. Riley and the remainder was held by Vintage. Shares issued under the Debt Exchange were then subject to the one-for-ten reverse stock split described in
Note 1
and
Note 16
.
|
|
|
|
|
•
|
16,666,667
warrants, each to purchase one share of our common stock at an exercise price of
$0.01
per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in
Note 1
, which adjusted the number of warrants to
1,666,666
and the exercise price remained
$0.01
.
|
Immediately after completion of the Equitization Transactions, Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and Tranche A-3 of the Last Out Term Loans had a balance of
$114.0 million
, including accrued paid-in-kind interest, which bears interest at a fixed rate of
12.0%
per annum payable in cash and continues to bear the other terms described in
Note 14
. Based on Schedule 13D filings made by B. Riley and Vintage, as a result of the Equitization Transactions, Vintage increased its beneficial ownership in us to
32.8%
and B. Riley increased its beneficial ownership in us to
18.4%
inclusive of the outstanding warrants held by B. Riley.
NOTE 19
–INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
|
Accrued capital expenditures in accounts payable
|
$
|
—
|
|
$
|
123
|
|
|
Accreted interest expense on our Second Lien Term Loan Facility
|
$
|
—
|
|
$
|
3,202
|
|
The following cash activity is presented as a supplement to Condensed Consolidated Statements of Cash Flows and is included in
Net cash used in operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
|
Income tax payments (refunds), net
|
$
|
32
|
|
$
|
2,938
|
|
|
|
|
|
|
Interest payments on our U.S. Revolving Credit Facility
|
$
|
6,921
|
|
$
|
4,599
|
|
|
Interest payments on our Last Out Term Loans
|
1,022
|
|
—
|
|
|
Interest payments on our Second Lien Term Loan Facility
|
—
|
|
7,627
|
|
|
Total cash paid for interest
|
$
|
7,943
|
|
$
|
12,226
|
|
Interest expense
in our Condensed Consolidated Financial Statements consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|
Components associated with borrowings from:
|
|
|
|
|
|
U.S. Revolving Credit Facility
|
$
|
3,801
|
|
$
|
3,434
|
|
$
|
7,351
|
|
$
|
5,779
|
|
|
Last Out Term Loans - cash interest
|
3,606
|
|
—
|
|
4,119
|
|
—
|
|
|
Last Out Term Loans - paid-in-kind interest
|
3,881
|
|
—
|
|
4,941
|
|
—
|
|
|
Second Lien Term Loan Facility
|
—
|
|
2,191
|
|
—
|
|
7,460
|
|
|
Foreign Revolving Credit Facilities
|
—
|
|
145
|
|
—
|
|
279
|
|
|
|
11,288
|
|
5,770
|
|
16,411
|
|
13,518
|
|
|
Components associated with amortization or accretion of:
|
|
|
|
|
|
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
|
8,880
|
|
5,113
|
|
14,149
|
|
8,314
|
|
|
U.S. Revolving Credit Facility - contingent consent fee for Amendment 16
(1)
|
4,674
|
|
—
|
|
4,674
|
|
—
|
|
|
Last Out Term Loans - discount and financing fees
|
1,479
|
|
—
|
|
2,069
|
|
—
|
|
|
Second Lien Term Loan Facility - discount and financing fees
|
—
|
|
833
|
|
—
|
|
3,202
|
|
|
|
15,033
|
|
5,946
|
|
20,892
|
|
11,516
|
|
|
|
|
|
|
|
|
Other interest expense
|
516
|
|
161
|
|
668
|
|
295
|
|
|
|
|
|
|
|
|
Total interest expense
|
$
|
26,837
|
|
$
|
11,877
|
|
$
|
37,971
|
|
$
|
25,329
|
|
|
|
|
|
(1)
|
As described in
Note 13
, in connection with Amendment No. 16, a contingent consent fee of
$13.9 million
(
4.0%
of total availability) is payable on December 15, 2019, but will be waived if certain actions are undertaken to refinance the facility by that date. We recorded the contingent consent fee as part of deferred financing fees in other current assets in the Condensed Consolidated Balance Sheets because it has been earned but may be waived, and it is being amortized to interest expense through December 15, 2019. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of
1.0%
of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental monthly fee of
1.0%
of total availability of the U.S. Revolving Credit Facility after December 15, 2019. No expense has been recognized for the deferred ticking fee because the company believes it is not probable of being earned by the lenders.
|
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)
|
June 30, 2019
|
December 31, 2018
|
June 30, 2018
|
December 31, 2017
|
|
Held by foreign entities
|
$
|
30,932
|
|
$
|
35,522
|
|
$
|
27,955
|
|
$
|
42,490
|
|
|
Held by United States entities
|
4,258
|
|
7,692
|
|
557
|
|
1,227
|
|
|
Cash and cash equivalents of continuing operations
|
35,190
|
|
43,214
|
|
28,512
|
|
43,717
|
|
|
|
|
|
|
|
|
Reinsurance reserve requirements
|
5,350
|
|
11,768
|
|
25,269
|
|
21,061
|
|
|
Restricted foreign accounts
|
3,830
|
|
5,297
|
|
6,442
|
|
4,919
|
|
|
Sale proceeds held in escrow
|
—
|
|
—
|
|
591
|
|
—
|
|
|
Restricted cash and cash equivalents
|
9,180
|
|
17,065
|
|
32,302
|
|
25,980
|
|
|
Total cash, cash equivalents and restricted cash of continuing operations shown in the Condensed Consolidated Statements of Cash Flows
|
$
|
44,370
|
|
$
|
60,279
|
|
$
|
60,814
|
|
$
|
69,697
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents of discontinued operations
|
$
|
—
|
|
$
|
—
|
|
$
|
10,437
|
|
$
|
12,950
|
|
Our U.S. Revolving Credit Facility described in
Note 13
allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.
NOTE 20
– PROVISION FOR INCOME TAXES
In the three months ended
June 30, 2019
, income tax expense was
$1.9 million
, resulting in an effective tax rate of
(7.15)%
. 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.
In the three months ended
June 30, 2018
, we recognized an income tax benefit of
$1.9 million
, resulting in an effective tax rate of
0.9%
. Our effective tax rate for the three months ended
June 30, 2018
was lower than our statutory rate primarily due to foreign losses in our Vølund & Other Renewable segment and disallowed interest expense pursuant to the United States Tax Cuts and Jobs Act (the "Tax Act") that are subject to valuation allowances as well as the impact of the
$37.5 million
non-deductible goodwill impairment and other nondeductible expenses, offset by favorable discrete items of
$0.4 million
. The effective tax rate for the three months ended
June 30, 2018
also reflects the reduced federal corporate income tax rate enacted as part of the Tax Act and the impact of a change in our mix of domestic and foreign earnings.
In the six months ended
June 30, 2019
, income tax expense was
$2.5 million
, resulting in an effective tax rate of
(3.3)%
. Our effective tax rate for the six months ended
June 30, 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 unfavorable discrete items of
$0.1 million
in the six months ended
June 30, 2019
.
In the six months ended
June 30, 2018
, income tax expense was
$5.0 million
, an effective tax rate of
(1.6)%
that was lower than our statutory rate primarily due to the reasons noted above as well as an
$18.4 million
impairment of our equity method
investment in India that was offset by valuation allowances and unfavorable discrete items of
$1.8 million
in the first quarter. The discrete items include a valuation allowance on the net deferred tax assets of one of our foreign subsidiaries and the income tax effects of vested and exercised share-based compensation awards.
Sections 382 and 383 of the Internal Revenue Code ("IRC") limits for US federal income tax purposes, the annual use of NOL carryforwards (including previously disallowed interest carryforwards) and tax credit carryforwards, respectively, following an ownership change. Under IRC Section 382 (Section 382), a company has undergone an ownership change if shareholders owning at least 5% of the Company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company determined that a Section 382 ownership change occurred on July 23, 2019 as a result of the "Equitization Transactions" described in
Note 18
. As a result of this change in ownership, the Company estimated that the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) will become limited to approximately
$1.2 million
annually (
$0.3 million
tax effected). The Company is currently in the process of refining and finalizing these calculations. The Company maintains a full valuation allowance on its net deferred tax assets including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.
New Tax Act
The United States Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to the United States income tax law. Beginning in 2018, the Tax Act reduced the United States statutory corporate income tax rate from 35% to 21% and created a modified territorial system that will generally allow United States companies a full dividend received deduction for any future dividends from non-U.S. subsidiaries. In addition to the tax rate reduction and changes to the territorial nature of the US tax system, the Tax Act introduced a new limitation on interest deductions, a Foreign Derived Intangible Income (“FDII”) and new minimum tax on foreign sourced income, Global Low Taxed Intangible Income (“GILTI”). The Company will account for GILTI as a period cost in the year the tax is incurred. In 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 21
– CONTINGENCIES
Stockholder Class Action Litigation
On March 3, 2017 and March 13, 2017, the Company and certain of its former officers were named as defendants in
two
separate but largely identical complaints alleging violations of the federal securities laws. The
two
complaints were brought on behalf of a class of investors who purchased the Company's common stock between July 1, 2015 and February 28, 2017 and were filed in the United States District Court for the Western District of North Carolina (collectively, the "Stockholder Litigation"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. Through subsequent amendments, the putative class period was expanded to include investors who purchased shares between June 17, 2015 and August 9, 2017. 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 November 13, 2017, defendants filed a motion to dismiss (“MTD”) in the Stockholder Litigation, and on December 28, 2017, plaintiff filed its opposition to the MTD. The federal trial court judge denied the MTD on February 8, 2018, which allowed the case to proceed. After engaging in some discovery, the parties held a mediation on December 14, 2018 to discuss possible settlement of the Stockholder Litigation. The parties did not successfully resolve the Stockholder Litigation at the December 14, 2018 mediation. Following a period of additional discovery, the parties held a second mediation on April 16, 2019. At the second mediation, the parties reached an agreement in principle to settle the Stockholder Litigation, which is subject to court approval. The agreement requires defendants to pay or cause to be paid
$19.5 million
into a settlement fund. The
$19.5 million
payment is expected to be covered in full by certain of our insurance carriers. The parties have subsequently executed a stipulation of settlement and have and have submitted it to the Court for its preliminary approval. 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
.
We believe the allegations in the Stockholder Litigation were without merit, and that the outcome of the Stockholder Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash
flows, net of any insurance coverage.
Derivative Litigation
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 purport to be current stockholders of the Company's common stock, are suing on behalf of the Company to recover costs and an unspecified amount of damages, and to force the implementation of certain 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.
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 other monetary payment associated with this settlement. The parties subsequently executed a stipulation of settlement and have submitted it to the Federal Court for its preliminary approval.
We believe the allegations in the Federal Court Derivative Litigation and State Court Derivative Litigation were without merit, and that the outcome of the Derivative Litigations will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Litigation Relating to the Equitization Transactions
On May 28, 2019, a putative class action complaint was filed against the Board in the Court of Chancery of the State of Delaware. The complaint is captioned Price v. Avril, et al., C.A. No. 2019-0393-JRS (Del. Ch.). The complaint asserted, among other things, that the Board breached their fiduciary duties by failing to disclose all material information necessary for a fully-informed vote on certain of the proposals presented for consideration at the annual meeting of the Company's stockholders. The plaintiff also filed a motion to preliminarily enjoin the stockholder vote on the proposals unless and until all material information regarding the proposals was disclosed to the Company’s stockholders. The plaintiff withdrew her motion to preliminarily enjoin the stockholder vote on the proposals following the Company’s issuance of a supplemental proxy statement on June 6, 2019. The Court granted the plaintiff's request to voluntarily dismiss this action with prejudice on July 31, 2019, and retained jurisdiction solely for the purpose of adjudicating an anticipated application for attorneys' fees and expenses incurred by plaintiff's counsel.
In addition, on June 3, 2019, a second putative class action complaint was filed against the Company, the Board and Mr. Young in the United States District Court for the District of Delaware. The complaint is captioned Kent v. Babcock & Wilcox Enterprises, Inc., et. al., No. 1:19-cv-01032-MN (D. Del.). The complaint asserts, among other things, claims under Sections 14(a) and 20(a) of the Exchange Act for allegedly disseminating a materially incomplete and misleading proxy statement in connection with the Equitization Transactions, which was filed with the SEC on May 13, 2019. The complaint seeks an order rescinding the Equitization Transactions or, in the alternative, awarding monetary damages as well as other relief. The plaintiff has yet to serve process on the Company, the Board or Mr. Young in this action. The Company, the Board and Mr. Young believe that the plaintiff’s allegations in the complaint lack merit and intend to vigorously defend against the action.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 22
– COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first two quarters of 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation (loss) gain
|
Net unrealized gain (loss) on derivative instruments
(1)
|
Net unrecognized loss 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
|
)
|
|
Other comprehensive loss before reclassifications
|
(7,979
|
)
|
(189
|
)
|
—
|
|
(8,168
|
)
|
|
Reclassified from AOCI to net income (loss)
|
3,176
|
|
(22
|
)
|
(514
|
)
|
2,640
|
|
|
Net other comprehensive (loss) income
|
(4,803
|
)
|
(211
|
)
|
(514
|
)
|
(5,528
|
)
|
|
Balance at June 30, 2019
|
$
|
(5,377
|
)
|
$
|
197
|
|
$
|
(2,830
|
)
|
$
|
(8,010
|
)
|
(1)
The remaining unrealized FX gain 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 (loss) income
|
(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
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
8,517
|
|
—
|
|
(513
|
)
|
112
|
|
8,116
|
|
|
Reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
381
|
|
(427
|
)
|
(46
|
)
|
|
Amounts reclassified from AOCI to pension, other accumulated postretirement benefit liabilities and deferred income taxes
|
—
|
|
—
|
|
—
|
|
(2,831
|
)
|
(2,831
|
)
|
|
Net other comprehensive income (loss)
|
8,517
|
|
—
|
|
(132
|
)
|
(3,146
|
)
|
5,239
|
|
|
Balance at June 30, 2018
|
$
|
(18,141
|
)
|
$
|
—
|
|
$
|
1,557
|
|
$
|
48
|
|
$
|
(16,536
|
)
|
(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.
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 June 30,
|
Six months ended June 30,
|
|
2019
|
2018
|
2019
|
2018
|
|
Release of currency translation gain with the sale of equity method investment and the sale of business
|
Equity in income and impairment of investees
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,044
|
|
|
|
Loss on sale of business
|
(3,176
|
)
|
—
|
|
(3,176
|
)
|
—
|
|
|
|
Net (loss) income
|
$
|
(3,176
|
)
|
$
|
—
|
|
$
|
(3,176
|
)
|
$
|
2,044
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
Revenues
|
$
|
—
|
|
$
|
(478
|
)
|
$
|
—
|
|
$
|
1,138
|
|
|
|
Cost of operations
|
—
|
|
(11
|
)
|
—
|
|
1
|
|
|
|
Other
|
22
|
|
—
|
|
(202
|
)
|
—
|
|
|
|
Total before tax
|
22
|
|
(489
|
)
|
(202
|
)
|
1,139
|
|
|
|
(Benefit) provision for income taxes
|
—
|
|
(108
|
)
|
—
|
|
248
|
|
|
|
Net income (loss)
|
$
|
22
|
|
$
|
(381
|
)
|
$
|
(202
|
)
|
$
|
891
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
514
|
|
$
|
427
|
|
$
|
870
|
|
$
|
811
|
|
|
|
Net income
|
$
|
514
|
|
$
|
427
|
|
$
|
870
|
|
$
|
811
|
|
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
|
June 30, 2019
|
Level 1
|
Level 2
|
Level 3
|
|
Corporate notes and bonds
|
$
|
12,844
|
|
$
|
12,844
|
|
$
|
—
|
|
$
|
—
|
|
|
Mutual funds
|
593
|
|
—
|
|
593
|
|
—
|
|
|
United States Government and agency securities
|
3,296
|
|
3,296
|
|
—
|
|
—
|
|
|
Total fair value of available-for-sale securities
|
$
|
16,733
|
|
$
|
16,140
|
|
$
|
593
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
June 30, 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 June 30, 2019, we do not hold any derivative assets or liabilities; the last of our derivative 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
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
•
|
Warrants.
The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
|
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 12
). 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 11
and
Note 6
).
NOTE 24
– RELATED PARTY TRANSACTIONS
The Letter Agreement described in
Note 18
between B. Riley Financial, Inc. (together with its affiliates, "B. Riley"), Vintage Capital Management, LLC ("Vintage") and the Company included agreement to negotiate one or more agreements that 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, 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 our board of directors is currently expected to remain at
seven
directors. On April 30, 2019, the Company entered into an Investor Rights Agreement with B. Riley Financial, Inc. and Vintage providing the governance rights contemplated by the Letter Agreement. The Company also entered into a Registration Rights Agreement with B. Riley Financial, Inc. and Vintage on April 30, 2019 providing each of B. Riley Financial, Inc. and Vintage with certain customary registration rights for the shares of our common stock that they hold.
Transactions with B. Riley and its Affiliates
B. Riley Financial, Inc. and its affiliates became the beneficial owner of greater than
five
percent of our common stock in May 2018, upon completion of the 2018 Rights Offering described in
Note 17
. Based on its Schedule 13D filing made on May 7, 2019, B. Riley beneficially owned
6.6%
of our outstanding common stock as of June 30, 2019. Based on its Schedule 13D filings following the completion of the Equitization Transactions described in
Note 18
, B. Riley beneficially owns
18.4%
of our outstanding common stock, inclusive of the warrants further described in
Note 15
, as of July 23, 2019.
B. Riley is party to the Last Out Term Loans as described in
Note 14
and
Note 18
and was a party to the Equitization Transactions described in
Note 18
, which included providing the Backstop Commitment to the 2019 Rights Offering described in
Note 17
and
Note 18
and receiving warrants as described in
Note 15
and
Note 18
.
We entered an agreement with BPRI Executive Consulting, LLC on November 19, 2018 for the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020, unless terminated by either party with thirty days written notice. Under this agreement, payments are
$0.75 million
per annum, paid monthly. Subject to the achievement of certain performance objectives as determined by the Compensation Committee of the Board, a bonus or bonuses may also be earned and payable to BPRI Executive Consulting, LLC. In June 2019, we granted a total of
$2.0 million
in cash bonuses to BRPI Executive Consulting LLC, an affiliate of B. Riley, for Mr. Young's performance and services. In December 2018, we granted a total of
8.4 million
stock appreciation rights to BRPI Executive Consulting, LLC, ("Non-employee SARs"). The Non-employee SARs expire
ten
years after the grant date and vest
100%
upon completion after the required years of service. Upon vesting, the Non-employee SARs may be exercised within
ten
business days following the end of any calendar quarter during which the volume weighted average share price is greater than the per share price goal of
$2.25
for
5.1 million
of the Non-employee SARS and
$2.5
0 for the remaining
3.3 million
of Non-employee SARS. Upon exercise of the Non-employee SARs, the holder receives a cash-settled payment equal to the number of Non-employee SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the Non-employee SARs base price of
$2.00
per stock appreciation right. Non-employee SARs are issued under a Non-employee SARs agreement. The Non-employee SARs are subject equitable adjustment for the one-for-ten reverse stock split described in
Note 1
.
Transactions with Vintage Capital Management, LLC
Based on its Schedule 13D filing on May 2, 2019, Vintage beneficially owned
14.9%
of our outstanding common stock as of June 30, 2019. Based on its Schedule 13D filings following the completion of the Equitization Transactions described in
Note 18
, Vintage beneficially owns
32.8%
of our outstanding common stock as of July 23, 2019.
Vintage was a party to Tranche A-1 of the Last Out Term Loans as described in
Note 14
and
Note 18
and was a party to the Equitization Transactions described in
Note 18
, which included participation in the 2019 Rights Offering described in
Note 17
and
Note 18
and conversion of Tranche A-1 of the Last Out Term Loans in the Debt Exchange as described in
Note 14
and
Note 18
. Prior to Debt Exchange,
$6.0 million
of Tranche A-1 had been transferred or sold to affiliates of B. Riley and the remainder was held by Vintage.
On April 10, 2018, the Company and Vintage entered into an equity commitment agreement (the "Equity Commitment Agreement"), which Equity Commitment Agreement amended and restated in its entirety the prior letter agreement, dated as of March 1, 2018, between the Company and Vintage, pursuant to which Vintage agreed to backstop the 2018 Rights Offering for the purpose of providing at least
$245 million
of new capital.
On July 23, 2019, concurrent with the completion of the 2019 Rights Offering, described in
Note 17
, the Tranche A-1 principal and paid-in-kind interest totaling
$38.2 million
was exchanged for
127.2 million
of our common shares of which
107.2
million of common shares were issued to Vintage, a related party, and the remainder were issued to B.Riley, also a related party, described above.
NOTE 25
– DIVESTITURE
Effective May 31, 2019, we sold all of the issued and outstanding capital stock of Loibl, a material handling business in Germany, to Lynx Holding GmbH for
€10.0 million
(approximately
$11.4 million
), subject to adjustment. We received
$7.4 million
in cash and recognized a
$3.6 million
pre-tax loss on sale of this business in the quarter ended June 30, 2019, net of
$0.7 million
in transaction costs. Proceeds from the transaction were primarily used to reduce outstanding balances under our U.S. Revolving Credit Facility. Through the sale, we were also able to release performance letters of credit totaling
$8.5 million
, which improved our borrowing capacity as described in
Note 13
. Prior to the divestiture, Loibl was part of the Vølund & Other Renewable segment and had revenues of approximately
$30 million
for the year ended December 31, 2018.
NOTE 26
– 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 ("Dürr"), 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. We primarily used proceeds from the transaction to reduce outstanding balances under our U.S. Revolving Credit Facility and for working capital purposes. During the quarter ended June 30, 2019, we received
$1.5 million
that was released from escrow. For the three and six months ended Jun 30, 2019,
$0.7 million
of pretax income from discontinued operations was recognized primarily for the release of an accrued liability. On July 1, 2019,
$2.7 million
was released from escrow to Dürr. The remaining escrow matters are expected to be resolved within 18 months from the closing date.
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:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended June 30, 2018
|
Six months ended June 30, 2018
|
|
Revenue
|
$
|
58,257
|
|
$
|
116,439
|
|
|
Cost of operations
|
45,521
|
|
90,189
|
|
|
Selling, general and administrative
|
7,597
|
|
17,024
|
|
|
Goodwill impairment
|
72,309
|
|
72,309
|
|
|
Research and development
|
390
|
|
756
|
|
|
Operating income (loss)
|
(67,560
|
)
|
(63,839
|
)
|
|
Net loss
|
(55,932
|
)
|
(59,428
|
)
|
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:
|
|
|
|
|
|
|
|
(in thousands)
|
Six months ended June 30, 2018
|
|
Depreciation and amortization
|
$
|
3,036
|
|
|
Goodwill impairment
|
72,309
|
|
|
Provision for deferred income taxes
|
(815
|
)
|
|
Purchase of property, plant equipment
|
77
|
|
NOTE 27
– NEW ACCOUNTING STANDARDS
New accounting standards adopted are summarized as follows:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application and continued applying the guidance under the lease standard in effect at that time to the comparative periods presented 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 also elected the "package of practical expedients", which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. However, we are not electing to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840.
We have implemented new leasing software and established new processes and internal controls designed to comply with the new lease accounting and disclosure requirements set by the new standard. The impact of the standard upon adoption increased our assets and liabilities within our Condensed Consolidated Balance Sheets by approximately
$16 million
but did not materially impact our results of operations or cash flows.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The new guidance provides companies with the option to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. Existing guidance requiring the effect of a change in tax law or rates to be recorded in continuing operations is not affected. This standard is effective for all public business entities for fiscal years beginning after December 15, 2018, and any interim periods within those fiscal years. We did not elect to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.
New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. The new guidance requires companies acting as the customer in a cloud hosting service arrangement to follow the requirements of ASC 350-40 for capitalizing implementation costs for internal-use software and requires the amortization of
these costs over the life of the related service contract. This standard is effective for all public business entities for fiscal years beginning after December 15, 2019, and any interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating the impact of this standard on our financial statements and whether we will elect to adopt this standard early.