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

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

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

Commission File No. 001-36876 

BABCOCK & WILCOX ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
47-2783641
(State or other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
1200 EAST MARKET STREET, SUITE 650
 
 
AKRON, OHIO
 
44305
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (330) 753-4511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
BW
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
  
Accelerated filer
 
¨

 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  x
The number of shares of the registrant's common stock outstanding at May 13, 2020 was 46,407,555.

1





TABLE OF CONTENTS
 
 
PAGE
 
3
 
3
 
4
 
5
 
6
 
7
 
8
37
 
37
 
39
 
46
 
54
54
54
 
56
56
56
56
58

2





PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three months ended March 31,
(in thousands, except per share amounts)
2020
2019
Revenues
$
148,554

$
231,936

Costs and expenses:
 
 
Cost of operations
114,628

201,067

Selling, general and administrative expenses
37,608

42,399

Advisory fees and settlement costs
4,239

13,610

Restructuring activities and spin-off transaction costs
1,951

6,079

Research and development costs
1,341

743

Gain on asset disposals, net
(915
)

Total costs and expenses
158,852

263,898

Operating loss
(10,298
)
(31,962
)
Other (expense) income:


Interest expense
(22,091
)
(11,134
)
Interest income
40

559

Benefit plans, net
7,536

3,030

Foreign exchange
(9,326
)
(10,153
)
Other – net
(206
)
420

Total other expense
(24,047
)
(17,278
)
Loss before income tax (benefit) expense
(34,345
)
(49,240
)
Income tax (benefit) expense
(810
)
626

Loss from continuing operations
(33,535
)
(49,866
)
Income from discontinued operations, net of tax
1,913


Net loss
(31,622
)
(49,866
)
Net income attributable to non-controlling interest
96

101

Net loss attributable to stockholders
$
(31,526
)
$
(49,765
)
 
 
 
Basic and diluted loss per share - continuing operations
$
(0.72
)
$
(2.71
)
Basic and diluted earnings per share - discontinued operations
0.04


Basic and diluted loss per share
$
(0.68
)
$
(2.71
)
 
 
 
Shares used in the computation of (loss) earnings per share:




Basic and diluted (1)
46,403

18,359

(1) Basic and diluted shares at March 31, 2019 reflect the bonus element for the 2019 Rights Offering on July 23, 2019 and the one-for-ten reverse stock split on July 24, 2019.

See accompanying notes to Condensed Consolidated Financial Statements.

3





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Three months ended March 31,
(in thousands)
2020
2019
Net loss
$
(31,622
)
$
(49,866
)
Other comprehensive income (loss):
 
 
Currency translation adjustments (CTA)
2,380

10,260

 
 
 
Derivative financial instruments:
 
 
Unrealized (gains) losses on derivative financial instruments

(1,311
)
Income tax benefit

(133
)
Unrealized (gains) losses on derivative financial instruments, net of taxes

(1,178
)
Derivative financial instrument losses (gains) reclassified into net loss

289

Income tax expense

65

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

224

 
 
 
Benefit obligations:
 
 
Amortization of benefit plan benefits
(246
)
(356
)
 
 
 
Other comprehensive income
2,134

8,950

Total comprehensive loss
(29,488
)
(40,916
)
Comprehensive income attributable to non-controlling interest
154

122

Comprehensive loss attributable to stockholders
$
(29,334
)
$
(40,794
)
See accompanying notes to Condensed Consolidated Financial Statements.

4





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
March 31, 2020
December 31, 2019
Cash and cash equivalents
$
35,384

$
43,772

Restricted cash and cash equivalents
11,001

13,169

Accounts receivable – trade, net
139,252

142,201

Accounts receivable – other
22,682

23,263

Contracts in progress
83,558

91,579

Inventories
60,713

63,103

Other current assets
24,588

27,044

Current assets held for sale
7,038

8,089

Total current assets
384,216

412,220

Net property, plant and equipment, and finance lease
94,803

97,053

Goodwill
46,961

47,160

Intangible assets
24,332

25,300

Right-of-use assets
12,185

12,498

Other assets
26,413

24,966

Non-current assets held for sale
7,199

7,322

Total assets
$
596,109

$
626,519






Revolving credit facilities
$

$
179,000

Last out term loans

103,953

Financing lease liabilities
787


Accounts payable
84,629

109,913

Accrued employee benefits
16,068

18,256

Advance billings on contracts
68,050

75,287

Accrued warranty expense
30,953

33,376

Operating lease liabilities
4,346

4,323

Other accrued liabilities
75,292

68,848

Current liabilities held for sale
8,286

9,538

Total current liabilities
288,411

602,494

Revolving credit facilities
185,000


Last out term loans
136,103


Pension and other accumulated postretirement benefit liabilities
251,355

259,272

Non-current finance lease liabilities
30,358

30,454

Non-current operating lease liabilities
8,092

8,388

Other non-current liabilities
20,404

20,850

Non-current liabilities held for sale
36


Total liabilities
919,759

921,458

Commitments and contingencies


Stockholders' deficit:


Common stock, par value $0.01 per share, authorized shares of 500,000; issued and outstanding shares of 46,407 and 46,374 at March 31, 2020 and December 31, 2019, respectively
4,703

4,699

Capital in excess of par value
1,143,490

1,142,614

Treasury stock at cost, 619 and 616 shares at March 31, 2020 and December 31, 2019, respectively
(105,716
)
(105,707
)
Accumulated deficit
(1,371,414
)
(1,339,888
)
Accumulated other comprehensive income
4,060

1,926

Stockholders' deficit attributable to shareholders
(324,877
)
(296,356
)
Non-controlling interest
1,227

1,417

Total stockholders' deficit
(323,650
)
(294,939
)
Total liabilities and stockholders' deficit
$
596,109

$
626,519


See accompanying notes to Condensed Consolidated Financial Statements.

5





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

 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Non-controlling
Interest
Total
Stockholders’
Deficit
 
 
Shares (1)
Par Value
 
 
(in thousands, except share and per share amounts)
Balance at December 31, 2018
16,879

$
1,748

$
1,047,062

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

$
(277,297
)
 
 
 
 
 
 
 
 
 
Net loss




(49,765
)

(101
)
(49,866
)
Currency translation adjustments





10,260

(21
)
10,239

Derivative financial instruments





(954
)

(954
)
Defined benefit obligations





(356
)

(356
)
Stock-based compensation charges
7


404

(22
)



382

Balance at March 31, 2019
16,886

$
1,748

$
1,047,466

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

$
(317,852
)
(1) Common stock shares reflect the one-for-ten reverse stock split on July 24, 2019.

 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interest
Total
Stockholders’
Deficit
 
 
Shares
Par Value
 
 
(in thousands, except share and per share amounts)
Balance at December 31, 2019
46,374

$
4,699

$
1,142,614

$
(105,707
)
$
(1,339,888
)
$
1,926

$
1,417

$
(294,939
)
 
 
 
 
 
 
 
 
 
Net loss




(31,526
)

(96
)
(31,622
)
Currency translation adjustments





2,380

(58
)
2,322

Defined benefit obligations





(246
)

(246
)
Stock-based compensation charges
33

4

876

(9
)



871

Dividends to non-controlling interest






(36
)
(36
)
Balance at March 31, 2020
46,407

$
4,703

$
1,143,490

$
(105,716
)
$
(1,371,414
)
$
4,060

$
1,227

$
(323,650
)

See accompanying notes to Condensed Consolidated Financial Statements.


6





BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three months ended March 31,
(in thousands)
2020
2019
Cash flows from operating activities:
 
Net loss
$
(31,622
)
$
(49,866
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization of long-lived assets
4,208

7,306

Amortization of deferred financing costs, debt discount and payment-in-kind interest
9,877

5,695

Non-cash operating lease expense
1,223

1,543

Gains on asset disposals
(915
)

Benefit from deferred income taxes, including valuation allowances
(424
)
(175
)
Mark to market (gains) losses and prior service cost amortization for pension and postretirement plans
(246
)
42

Stock-based compensation, net of associated income taxes
880

404

Changes in assets and liabilities:
 
 
Accounts receivable
10,599

192

Contracts in progress
7,690

8,729

Advance billings on contracts
(7,321
)
1,165

Inventories
1,286

(3,239
)
Income taxes
(1,888
)
(49
)
Accounts payable
(26,451
)
4,594

Accrued and other current liabilities
6,110

6,480

Accrued contract loss
(2,593
)
(30,903
)
Pension liabilities, accrued postretirement benefits and employee benefits
(10,258
)
(594
)
Other, net
4,384

10,980

Net cash used in operating activities
(35,461
)
(37,696
)
Cash flows from investing activities:
 
 
Purchase of property, plant and equipment
(2,394
)
(288
)
Purchases of available-for-sale securities
(6,352
)
(6,036
)
Sales and maturities of available-for-sale securities
3,420

957

Other, net
831

95

Net cash used in investing activities
(4,495
)
(5,272
)
Cash flows from financing activities:
 
 
Borrowings under our U.S. revolving credit facility
70,200

71,200

Repayments of our U.S. revolving credit facility
(64,200
)
(40,800
)
Borrowings under Last Out Term Loan Tranche A-2

10,000

Borrowings under Last Out Term Loan Tranche A-4
30,000


Repayments under our foreign revolving credit facilities

(600
)
Shares of our common stock returned to treasury stock
(9
)
(22
)
Debt issuance costs
(5,749
)
(6,675
)
Other, net
550


Net cash from financing activities
30,792

33,103

Effects of exchange rate changes on cash
(1,392
)
72

Net decrease in cash, cash equivalents and restricted cash
(10,556
)
(9,793
)
Cash, cash equivalents and restricted cash, beginning of period
56,941

60,279

Cash, cash equivalents and restricted cash, end of period
$
46,385

$
50,486


See accompanying notes to Condensed Consolidated Financial Statements.


7





BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020

NOTE 1 – BASIS OF PRESENTATION

These interim Condensed Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. (“B&W,” “management,” “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. 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 are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

As of December 31, 2019 and March 30, 2020, the date we issued our 2019 Consolidated Financial Statements, we were in compliance with the terms of the agreements governing our debt and no events of default existed. However, the Company’s uncertainty regarding liquidity and the ability to refinance our credit agreement (as amended, the "Amended Credit Agreement") by May 11, 2020 represented conditions and events that raised substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 2019 Consolidated Financial Statements were issued, as we were not able to assert that it was probable that our plans when fully implemented would alleviate the events and conditions.

In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 180 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. This global pandemic has disrupted business operations, trade, commerce, financial and credit markets, and daily life throughout the world. Our business has been adversely impacted by the measures taken by local governments and others to control the spread of this virus. While restrictions in some countries have begun to lessen, the Company's headquarters and the headquarters of our Babcock & Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where the Company and its customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some employees can work remotely, many customers and projects require B&W's employees to travel to customer and project worksites. Certain customers and significant projects are located in areas where travel restrictions have been imposed, certain customers have closed or reduced on-site activities, and timelines for completion of certain projects have also been extended into next year. Additionally, out of concern for our employees, those who are uncomfortable returning to worksites due to the pandemic are not required to do so. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus has also caused significant volatility and, at times, illiquidity in global equity and credit markets.

Since January 1, 2020 and through the issuance of our 2019 Consolidated Financial Statements on March 30, 2020, we took the following actions, among others, and have successfully implemented, or are in the process of implementing the following:
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. 19, No. 20 and No. 21 dated January 17, 2020, January 31, 2020 and March 27, 2020, respectively;
on January 31, 2020, received $30.0 million of additional gross borrowings from B. Riley Financial, Inc. (together with its affiliates, "B. Riley") under a new Tranche A-4 of Last Out Term Loans, as described in in Note 14;
on January 31, 2020, received an incremental Tranche A-5 of Last Out Term Loan commitment to be used in the event certain customer letters of credit are drawn, as described in Note 14;
on March 12, 2020, filed 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 2020 by approximately $25.0 million and would

8





increase contributions over the following five years. The Company cannot make any assurances that such waiver will be granted; and
on March 17, 2020, we fully settled the remaining escrow associated with the sale of Palm Beach Resource Recovery Corporation ("PBRRC") and received $4.5 million in cash.

In addition to the actions taken above, subsequent to March 30, 2020 we have taken the following actions:

on April 6, 2020, we fully settled the remaining escrow associated with the sale of the MEGTEC and Universal businesses and received $3.5 million in cash;
in April 2020, as part of the Company’s recent response to the impact of the COVID-19 pandemic on its business, the Company has taken the following cash conservation and cost reduction measures which include:
temporary payroll reductions and unpaid furloughs for certain employees:
temporarily deferring the monthly fee paid to BRPI Executive Consulting, LLC for the services of our Chief Executive Officer by 50%;
deferrals of the base salaries of our Chief Strategy Officer by 50%, Chief Financial Officer by 30% and our Senior Vice President of The Babcock & Wilcox Company by 30%;
suspension of our 401(k) match for U.S. employees for the remainder of 2020;
approval by the Company’s Board for a temporary deferral of 50% of the cash compensation payable to non-employee directors under the Company’s board compensation program to be paid during the first quarter of 2021;  
negotiating temporary rent payment deferrals related to leased facilities located in the U.S., Canada, Italy and Denmark;
exploring options for government loans and programs in the U.S. and abroad that would be appropriate and available;
we elected to defer, in accordance with the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law in March 2020, the contribution payment of $5.5 million for the 2020 Plan year that would have been made on April 15, 2020 related to our Pension Plan; and
on May 14, 2020, the Company entered into an agreement with its lenders amending and restating the Amended Credit Agreement, among the Company, Bank of America, N.A., as administrative agent (the "Administrative Agent") and lender, and the other lenders party thereto. The credit agreement, as amended and restated (the “A&R Credit Agreement”), among other amendments, extends the maturity date on the revolving credit facility to June 30, 2022 and the maturity date on the last out term loans (the "Last Out Term Loans") to December 30, 2022. Under the A&R Credit Agreement, B. Riley has committed to provide the Company with up to $70.0 million of additional Last Out Term Loans. B. Riley has also agreed to enter into a limited guaranty (the "B. Riley Guaranty") which provides for the guarantee of all of the Company's obligations with respect to the revolving credit facility (other than with respect to letters of credit and contingent obligations), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees. For more information regarding the A&R Credit Agreement and the additional last out term loans being provided by B. Riley, see Note 23.

Based upon the terms of the A&R Credit Agreement and the cash conservation and cost reduction measures taken to date, the Company is projecting sufficient liquidity to fund future operations and to meet its obligations as they become due for at least one year following the date that these Condensed Consolidated Financial Statements are issued. As a result, the Company has concluded that conditions and events, considered in the aggregate, no longer raise substantial doubt about the entity’s ability to continue as a going concern.


9





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 non-controlling interest:
 
Three months ended March 31,
(in thousands, except per share amounts)
2020
2019
Loss from continuing operations
$
(33,439
)
$
(49,765
)
Income from discontinued operations, net of tax
1,913


Net loss attributable to stockholders
$
(31,526
)
$
(49,765
)
 
 
 
Weighted average shares used to calculate basic and diluted earnings per share (1)
46,403

18,359

 
 
 
Basic and diluted loss per share - continuing operations
$
(0.72
)
$
(2.71
)
Basic and diluted earnings per share - discontinued operations
0.04


Basic and diluted loss per share
$
(0.68
)
$
(2.71
)
(1) Weighted average shares used to calculate basic and diluted earnings (loss) 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

In July 2019, the Company completed the 2019 Rights Offering 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 March 31, 2019 was 16,881.

Because we incurred a net loss in the three months ended March 31, 2020 and 2019, basic and diluted shares are the same.
If we had net income in the three months ended March 31, 2020, diluted shares would include an additional 0.5 million shares.

We excluded 0.5 million and 0.3 million shares related to stock options from the diluted share calculation for the three months ended March 31, 2020 and 2019, respectively, because their effect would have been anti-dilutive.
     
NOTE 3 – SEGMENT REPORTING

Our operations are assessed based on three reportable segments 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.
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.
SPIG segment: focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services.

10






Revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Babcock & Wilcox segment elimination is revenue associated with construction services. The primary component of total eliminations is associated with Babcock & Wilcox segment construction services provided to the SPIG segment. An analysis of our operations by segment is as follows:
 
Three months ended March 31,
(in thousands)
2020
2019
Revenues:
 
 
Babcock & Wilcox segment
 
 
Retrofits
$
29,648

$
30,674

New build utility and environmental
6,551

68,907

Aftermarket parts and field engineering services
63,690

63,087

Industrial steam generation
23,557

47,010

Eliminations
(1,490
)
(21,120
)
 
121,956

188,558

Vølund & Other Renewable segment
 
 
Renewable new build and services
11,813

29,533

Operations and maintenance services
3,498

560

Eliminations
(2
)
(561
)
 
15,309

29,532

SPIG segment
 
 
New build cooling systems
7,002

21,006

Aftermarket cooling system services
4,339

8,171

Eliminations
(4
)
(275
)
 
11,337

28,902

 
 
 
Eliminations
(48
)
(15,056
)
 
$
148,554

$
231,936



11





The presentation of the components of our adjusted EBITDA in the table below is 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, MTM pension adjustments, restructuring and spin-off costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment.

Adjusted EBITDA for each segment is presented below with a reconciliation to loss before income tax.

Three months ended March 31,
(in thousands)
2020
2019
Adjusted EBITDA (1)




Babcock & Wilcox segment
$
10,654

$
9,089

Vølund & Other Renewable segment
(3,293
)
(8,789
)
SPIG segment
(1,192
)
658

Corporate
(4,143
)
(4,591
)
Research and development costs
(1,341
)
(743
)

685

(4,376
)





Restructuring activities and spin-off transaction costs
(1,951
)
(6,079
)
Financial advisory services
(929
)
(3,958
)
Settlement cost to exit Vølund contract (2)

(6,575
)
Advisory fees for settlement costs and liquidity planning
(2,614
)
(3,077
)
Litigation legal costs
(696
)

Stock compensation
(712
)
(591
)
Loss from business held for sale
(788
)

Depreciation & amortization
(4,208
)
(7,306
)
Gain on asset disposals, net
915


Operating loss
(10,298
)
(31,962
)
Interest expense, net
(22,051
)
(10,575
)
Net pension benefit before MTM
7,536

3,428

MTM loss from benefit plans

(398
)
Foreign exchange
(9,326
)
(10,153
)
Other – net
(206
)
420

Loss before income tax (benefit) expense
$
(34,345
)
$
(49,240
)
(1) Adjusted EBITDA, for the three months ended March 31, 2019, excludes stock compensation that was previously included in segment results and totals $0.1 million in the Babcock & Wilcox segment, $0.1 million in the Vølund & Other Renewable segment, and $0.4 million in Corporate. Beginning in the third quarter of 2019, stock compensation is no longer considered in Adjusted EBITDA for purposes of managing the business, and prior periods have been adjusted to be presented on a comparable basis.
(2) 
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 to act, and our risk related to acting, as the prime EPC should the project have moved 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

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.


12





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 segment, accounted for 31% and 18% of our revenue for the three months ended March 31, 2020 and 2019, 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 69% and 82% of our revenue for the three months ended March 31, 2020 and 2019, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all three of our segments. Typically, revenue is recognized over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the cost-to-cost input method contains a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position and have in our Vølund & Other Renewable segment. Refer to Note 3 for our disaggregation of revenue by product line.

As of March 31, 2020, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues using a cost-to-cost input method. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, fluctuations in foreign exchange rates or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.

We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for enforcing the claim, the cause of any additional costs incurred and whether those costs are identifiable or otherwise determinable, the nature and reasonableness of those costs, the objective evidence available to support the amount of the claim, and our relevant history with the counter-party that supports our expectations about their willingness and ability to pay for the additional cost along with a reasonable margin.

We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception that has not been recorded for sales commission as a liability has not been incurred at that point.


13





Contract Balances

The following represents the components of our contracts in progress and advance billings on contracts included in our Condensed Consolidated Balance Sheets:
(in thousands)
March 31, 2020
December 31, 2019
$ Change
% Change
Contract assets - included in contracts in progress:
 
 
 
 
Costs incurred less costs of revenue recognized
$
29,877

$
29,877

$

 %
Revenues recognized less billings to customers
53,681

61,702

(8,021
)
(13
)%
Contracts in progress
$
83,558

$
91,579

$
(8,021
)
(9
)%
Contract liabilities - included in advance billings on contracts:
 
 
 
 
Billings to customers less revenues recognized
$
66,485

$
76,468

$
(9,983
)
(13
)%
Costs of revenue recognized less cost incurred
1,565

(1,181
)
2,746

(233
)%
Advance billings on contracts
$
68,050

$
75,287

$
(7,237
)
(10
)%
 
 
 
 
 
Net contract balance
$
15,508

$
16,292

$
(784
)
5
 %
 
 
 
 
 
Accrued contract losses
$
3,545

$
6,139

$
(2,594
)
(42
)%

Backlog

On March 31, 2020 we had $501.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 35.6%, 28.1% and 36.3% of our remaining performance obligations as revenue in the remainder of 2020, 2021 and thereafter, respectively.

Changes in Contract Estimates

In the three months ended March 31, 2020 and 2019, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
 
Three months ended March 31,
(in thousands)
2020
2019
Increases in gross profits for changes in estimates for over time contracts
$
8,182

$
9,525

Decreases in gross profits for changes in estimates for over time contracts
(4,845
)
(9,396
)
Net changes in gross profits for changes in estimates for over time contracts
$
3,337

$
129


Vølund EPC Loss Contracts

We had six Vølund EPC 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 addition to these loss contracts, we have one remaining extended scope contract in our Vølund & Other Renewables segment which turned into a loss contract in the fourth quarter of 2019.

In the three months ended March 31, 2020 and 2019, we recorded $0.1 million and $(4.1) million in net gains (losses), respectively, resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In the three months ended March 31, 2020 and 2019, we did not change our estimate of liquidated damages on these contracts. Total anticipated liquidated damages associated with these six contracts were $86.5 million and $88.6 million at March 31, 2020 and March 31, 2019, respectively.

As of March 31, 2020, 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

14





£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. In accordance with the settlement, we 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 loss contract 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 contract, 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 March 31, 2020, the status of these six Vølund EPC loss contracts was as follows:

The first contract, a waste-to-energy plant in Denmark, became a loss contract in the second quarter of 2016. As of March 31, 2020, this contract was approximately 99% complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. 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 months ended March 31, 2020, we did not recognize additional contract losses. Our estimate at completion as of March 31, 2020 includes $8.9 million of total estimated liquidated damages. As of March 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.7 million. In the three months ended March 31, 2019, we did not recognize further charges on the contract. As of March 31, 2019, this contract had $3.6 million of accrued losses and was 97% complete.

The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of March 31, 2020, 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 months ended March 31, 2020, we recognized additional contract losses of $0.1 million on this contract as a result of additional punch list and other commissioning costs. Our estimate at completion as of March 31, 2020 includes $18.7 million of total estimated liquidated damages due to schedule delays. Our estimates at completion as of March 31, 2020 and 2019 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of March 31, 2020, we expect no future charges due to this contract and, accordingly, have no reserve for estimated contract losses. In the three months ended March 31, 2019, we recognized contract losses of $0.8 million on this contract as a result of repairs required during startup commissioning activities, additional expected punch list and other commissioning costs, and changes in construction cost estimates. As of March 31, 2019, this contract had $1.4 million of accrued losses and was 98% complete.

The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of March 31, 2020, 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 months ended March 31, 2020, we did not recognize additional contract losses. Our estimate at completion as of March 31, 2020 includes $6.6 million of total estimated liquidated damages due to schedule delays. As of March 31, 2020, we expect no future charges due to this contract and, accordingly, we have no reserve for estimated contract losses. In the three months ended March 31, 2019, we did not recognize additional contract losses. As of March 31, 2019, this contract had $0.3 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 March 31, 2020, this contract was approximately 100% 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

15





months ended March 31, 2020, we recognized additional contract charges of $0.1 million on this contract due to changes in cost to complete remaining punch list and other close out items. Our estimate at completion as of March 31, 2020 includes $20.4 million of total estimated liquidated damages due to schedule delays. Our estimates at completion as of March 31, 2020 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of March 31, 2020, we expect no future charges due to this contract and, accordingly, we have no reserve for estimated contract losses. In the three months ended March 31, 2019, we recognized additional contract losses of $0.3 million on this contract due to changes in estimated cost to complete remaining punch list and other close out items. Our estimates at completion as of March 31, 2019 also include contractual bonus opportunities for guaranteed higher power output. As of March 31, 2019, this contract had $0.8 million of accrued losses and was 99% complete.

The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of March 31, 2020, this contract was approximately 99% 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 loss contract 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 eliminated all historical claims and remaining liquidated damages. Remaining items at March 31, 2020 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 March 31, 2020, our estimated loss on the contract improved by $0.3 million. Our estimate at completion as of March 31, 2020, includes $13.3 million of total estimated liquidated damages due to schedule delays. As of March 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.9 million. During the three months ended March 31, 2019, we recognized contract losses of $2.3 million due to a change in the estimate for subcontractor close out costs. As of March 31, 2019, this contract had $15.8 million of accrued losses and was 90% complete.

The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of March 31, 2020, 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 months ended March 31, 2020, we did not recognize additional contract losses. Our estimate at completion as of March 31, 2020 includes $18.7 million of total estimated liquidated damages due to schedule delays. As of March 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.2 million. In the three months ended March 31, 2019, we revised our revenue and costs at completion for this contract, which resulted in additional contract losses of $0.8 million related to matters encountered in completing punch list items. As of March 31, 2019, this contract had $0.6 million of accrued losses and was 98% complete.

In the fourth quarter of 2019, one of our other Vølund renewable energy contracts turned into a loss contract (estimated loss of $0.2 million) due to the extension of time and other start-up costs associated with the completion of the trial operations run and turnover to the client. This contract was turned over to the client in October 2019.  During the three months ended March 31, 2020, we did not recognize additional contract losses and during the three months ended March 31, 2019, we recognized additional charges of $0.2 million on this contract.

In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure. Provisional regulatory approval to begin structural repairs to the failed beam was obtained on March 29, 2018 (later than previously estimated), and full approval to proceed with repairs was obtained in April 2018. Full access to the site was obtained on June 6, 2018 after completion of the repairs to the structure. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately $36 million, which is included in the March 31, 2020 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; which our insurer paid us in September 2019.


16





The Company is continuing to pursue other potential insurance recoveries and claims where appropriate and available.

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. We made a payment of £5.0 million (approximately $6.6 million) on April 5, 2019 for the settlement which eliminated our obligations to act, and our risk related to acting, as the prime EPC should the project have moved forward.

SPIG's Loss Contracts

At March 31, 2020, SPIG had two significant loss contracts, each of which are contracts for a dry cooling system for a gas-fired power plant in the United States. In the three months ended March 31, 2020 and 2019, we did not recognize additional charges on these contracts.

At March 31, 2020, the design and procurement are substantially complete, and construction is nearing completion on the first loss contract.  Overall, the contract is approximately 100% complete with only performance testing remaining which will be complete in the third quarter of 2020. As of March 31, 2020, we have no reserve for estimated contract losses. As of March 31, 2019, this contract had accrued losses of $2.0 million and was 86% complete. Construction is being performed by the Babcock & Wilcox segment, but the contract loss is included in the SPIG segment.

At March 31, 2020, the design and procurement are nearing completion on the second loss contract.  Overall, the contract is approximately 89% complete and final completion is expected to be in the third quarter of 2020.  As of March 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.8 million related to this contract.  As of March 31, 2019, this contract had accrued losses of $0.1 million and was 97% complete. The percent completion declined at March 31, 2020 compared to the prior year period due to an increase in additional contract charges of $3.3 million recognized in late 2019 due to issues with the seismic design and fans.

NOTE 5 – INVENTORIES

The components of inventories are as follows:
(in thousands)
March 31, 2020
December 31, 2019
Raw materials and supplies
$
40,659

$
42,685

Work in progress
7,224

7,502

Finished goods
12,830

12,916

Total inventories
$
60,713

$
63,103


NOTE 6 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASE

Property, plant and equipment less accumulated depreciation is as follows:
(in thousands)
March 31, 2020
December 31, 2019
Land
$
2,994

$
2,998

Buildings
83,548

84,005

Machinery and equipment
152,021

154,016

Property under construction
7,063

6,204

 
245,626

247,223

Less accumulated depreciation
180,844

180,562

Net property, plant and equipment
64,782

66,661

Finance lease
30,548

30,405

Less finance lease accumulated amortization
527

13

Net property, plant and equipment, and finance lease
$
94,803

$
97,053




17





NOTE 7 - GOODWILL

The following summarizes the changes in the net carrying amount of goodwill as of March 31, 2020:
(in thousands)
Babcock & Wilcox Segment
Balance at December 31, 2019
$
47,160

Currency translation adjustments
(199
)
Balance at March 31, 2020
$
46,961


Goodwill is tested for impairment annually and when impairment indicators exist. All of our remaining goodwill is related to the Babcock & Wilcox reporting unit and the Babcock & Wilcox Construction Company reporting unit, which are both included in the Babcock & Wilcox segment.

In the first quarter of 2020, our share price declined significantly, which we considered to be a triggering event for an interim goodwill assessment. We primarily attributed the significant decline in our share price to the current macroeconomic conditions and impacts COVID-19 will have on our operations. In the interim test, we compared the fair value of the reporting unit to its carrying value as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. Key Level 3 unobservable inputs in our valuation included cash flows and long-term growth rates reflective of management's forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. A discount rate of 11.5% and 15.0% was used for the Babcock & Wilcox and Babcock & Wilcox Construction Company reporting units, respectively, which is based on the weighted average cost of capital using guideline public company data, factoring in current market data and company specific risk factors. As a result of the impairment test, no impairment was indicated during the three months ended March 31, 2020.

NOTE 8 – INTANGIBLE ASSETS

Our intangible assets are as follows:
(in thousands)
March 31, 2020
December 31, 2019
Definite-lived intangible assets
 
 
Customer relationships
$
24,414

$
24,440

Unpatented technology
14,884

14,917

Patented technology
2,596

2,598

Tradename
12,350

12,372

All other
9,238

9,225

Gross value of definite-lived intangible assets
63,482

63,552

Customer relationships amortization
(18,886
)
(18,616
)
Unpatented technology amortization
(5,609
)
(5,245
)
Patented technology amortization
(2,507
)
(2,476
)
Tradename amortization
(4,400
)
(4,257
)
All other amortization
(9,053
)
(8,963
)
Accumulated amortization
(40,455
)
(39,557
)
Net definite-lived intangible assets
$
23,027

$
23,995

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

$
1,305

Total intangible assets, net
$
24,332

$
25,300



18





The following summarizes the changes in the carrying amount of intangible assets:
 
Three months ended March 31,
(in thousands)
2020
2019
Balance at beginning of period
$
25,300

$
30,793

Amortization expense
(895
)
(1,187
)
Currency translation adjustments and other
(73
)
(490
)
Balance at end of the period
$
24,332

$
29,116


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
Year ending December 31, 2020
$
2,392

Year ending December 31, 2021
3,042

Year ending December 31, 2022
3,012

Year ending December 31, 2023
3,011

Year ending December 31, 2024
2,938

Year ending December 31, 2025
2,454

Thereafter
6,178


The circumstances leading to the first quarter interim goodwill assessment as described in Note 7 also triggered an evaluation for long-lived assets, including intangible assets. We have performed an ASC 360-10-35 recoverability test of other long-lived assets, including intangible assets for the Vølund and SPIG asset groups. With respect to these asset groups, future cash flows were estimated over the expected remaining life of the assets, and the Company determined that, on an undiscounted basis, expected cash flows exceeded the carrying value of the asset groups, and no impairment was indicated during the three months ended March 31, 2020.

NOTE 9 – LEASES

The components of lease expense included on our Condensed Consolidated Statements of Operations were as follows:
 
 
Three months ended March 31,
(in thousands)
Classification
2020
2019
Operating lease expense:
 
 
 
Operating lease expense
Selling, general and administrative expenses
$
1,507

$
1,909

Short-term lease expense
Selling, general and administrative expenses
188

2,861

Variable lease expense (1)
Selling, general and administrative expenses
776

112

Total operating lease expense
 
$
2,471

$
4,882


 


 
Finance lease expense:
 
 
 
Amortization of right-of-use assets
Selling, general and administrative expenses
$
515

$

Interest on lease liabilities
Interest expense
615


Total finance lease expense
 
$
1,130

$


 
 
 
Sublease income (2)
Other – net
$
(22
)
$
(10
)
Net lease cost
 
$
3,579

$
4,872

(1) Variable lease expense primarily consists of common area maintenance expenses paid directly to lessors of real estate leases.
(2) Sublease income excludes rental income from owned properties, which is not material.


19





Other information related to leases is as follows:
(in thousands)
March 31, 2020
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
$
1,400

$
6,578

Operating cash flows from finance leases
615

14

Financing cash flows from finance leases
(586
)
(12
)
 
 
 
Right-of-use assets obtained in exchange for lease liabilities:
 
 
Operating leases
$
927

$
3,014

Finance leases
$
146

$
30,404

 
 
 
Weighted-average remaining lease term:
 
 
Operating leases (in years)
3.3

3.4

Finance leases (in years)
14.7

15.0

Weighted-average discount rate:
 
 
Operating leases
9.13
%
9.27
%
Finance leases
8.00
%
8.00
%

Amounts relating to leases were presented on our Condensed Consolidated Balance Sheets in the following line items:
(in thousands)
 
 
 
Assets:
Classification
March 31, 2020
December 31, 2019
Operating lease assets
Right-of-use assets
$
12,185

$
12,498

Finance lease assets
Net property, plant and equipment, and finance lease
30,021

30,392

Total non-current lease assets
 
$
42,206

$
42,890

 
 
 
 
Liabilities:
 
 
 
Current
 
 
 
Operating lease liabilities
Operating lease liabilities
$
4,346

$
4,323

Finance lease liabilities
Financing lease liabilities
787

(38
)
Non-current
 
 
 
Operating lease liabilities
Non-current operating lease liabilities
8,092

8,388

Finance lease liabilities
Non-current finance lease liabilities
30,358

30,454

Total lease liabilities
 
$
43,583

$
43,127



20





Future minimum lease payments required under non-cancellable leases as of March 31, 2020 were as follows:
(in thousands)
Operating Leases
Finance Leases
Total
2020 (excluding the three months ended March 31, 2020)
$
4,516

$
2,410

$
6,926

2021
3,946

3,277

7,223

2022
2,736

3,342

6,078

2023
1,832

3,407

5,239

2024
1,113

3,472

4,585

Thereafter
105

38,285

38,390

   Total
$
14,248

$
54,193

$
68,441

Less imputed interest
(1,810
)
(23,048
)
(24,858
)
Lease liability
$
12,438

$
31,145

$
43,583


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:
 
Three months ended March 31,
(in thousands)
2020
2019
Balance at beginning of period
$
33,376

$
45,117

Additions
1,350

1,991

Expirations and other changes
(517
)
(385
)
Payments
(3,119
)
(1,271
)
Translation and other
(137
)
(628
)
Balance at end of period
$
30,953

$
44,824


We accrue estimated expense included in cost of operations on our Condensed Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

NOTE 11 – RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS

The following tables summarize the restructuring activity and spin-off costs incurred by segment:
 
Three months ended March 31,
 
Three months ended March 31,
 
2020
 
2019
(in thousands)
Total
Severance and related costs
Other (1)
 
Severance and related costs
Babcock & Wilcox segment
$
1,323

$
542

$
781

 
$
3,947

Vølund & Other Renewable segment
559

559


 
578

SPIG segment



 
144

Corporate
69


69

 
1,410

 
$
1,951

$
1,101

$
850

 
$
6,079

(1) Other amounts consist primarily of exit, spin-off, relocation and other costs.


21





Restructuring liabilities are included in other accrued liabilities on our Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
 
Three months ended March 31,
(in thousands)
2020
2019
Balance at beginning of period 
$
5,358

$
7,359

Restructuring expense
1,951

6,079

Payments
(1,968
)
(3,242
)
Balance at end of period
$
5,341

$
10,196


Accrued restructuring liabilities at March 31, 2020 and 2019 relate primarily to employee termination benefits. Severance payments are expected to extend through the end of 2020.

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 March 31,
 
Three months ended March 31,
(in thousands)
2020
2019
 
2020
2019
Interest cost
$
8,261

$
10,860

 
$
72

$
121

Expected return on plan assets
(15,641
)
(13,920
)
 


Amortization of prior service cost
43

50

 
(271
)
(539
)
Recognized net actuarial (gain) loss

398

 


Benefit plans, net (1)
(7,337
)
(2,612
)
 
(199
)
(418
)
Service cost included in COS (2)
211

217

 
5

4

Net periodic benefit cost (benefit)
$
(7,126
)
$
(2,395
)
 
$
(194
)
$
(414
)
(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 operations in the Condensed Consolidated Statement of Operations and is allocated to the Babcock & Wilcox segment.

Recognized net actuarial (gain) loss consists primarily of our reported actuarial (gain) loss, curtailments, settlements, and the difference between the actual return on plan assets and the expected return on plan assets. There were no mark to market ("MTM") adjustments for our pension and other postretirement benefit plans during the three months ended March 31, 2020 and a $0.4 million loss in the three months ended March 31, 2019. We have excluded the recognized net actuarial (gain) loss from our reportable segments and such amount has been reflected in Note 3 as the MTM loss from benefit plans in the reconciliation of Adjusted EBITDA for each segment to consolidated loss before income tax. The recognized net actuarial (gain) loss was recorded in benefit plans, net in our Condensed Consolidated Statements of Operations.

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

We made contributions to our pension and other postretirement benefit plans totaling $0.4 million and $1.5 million during the three months ended March 31, 2020 and 2019, respectively. Expected employer contributions to trusts of defined benefit plans above assume that relief is granted under U.S. pension contribution waivers, which would defer minimum pension contributions for approximately one year to then be repaid over a five-year period. Related to the 2018 Plan year, we filed a request for waiver with the IRS in January 2019 and obtained a letter on August 27, 2019 that the waiver request had been approved subject to certain conditions. We filed a waiver request with the IRS on March 12, 2020 related to the 2019 Plan year. The Company was initially required to resume quarterly contributions on April 15, 2020 equal to the required quarterly contributions to the Plan. If the temporary hardship waiver for the 2019 Plan year is not fully granted, required minimum employer pension contributions could increase by approximately $25.0 million, for total pension and other postretirement

22





benefit funding of approximately $46.0 million or greater in 2020, plus interest and, if assessed, penalties. The total funding contributions of $46.0 million estimated for 2020 includes $1.1 million for the 2018 Plan year, $23.7 million for the 2019 Plan year, $16.5 million for the 2020 Plan year and $4.5 million related to other non-qualified pension plans, non-U.S. pension plans and other postretirement benefits plans. The Company cannot make any assurances that such waiver will be granted.

On March 27, 2020, the CARES Act was signed into law and among other things, provides deferral of certain U.S. pension plan contributions until January 1, 2021. We elected to defer the contribution payment of $5.5 million for the 2020 Plan year that would have been made on April 15, 2020.

NOTE 13 – REVOLVING DEBT

Our revolving debt is comprised of a revolving credit facility in the U.S. with balances of $185.0 million as of March 31, 2020 and $179.0 million as of December 31, 2019.

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 to the Amended Credit Agreement, including several to avoid default under the financial and other covenants specified in the Amended Credit Agreement. As of March 31, 2020, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to $330.3 million, (reduced to $326.9 million in April 2020 as a result of the settlement of escrow funds related to the sales of MEGTEC and Universal) 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 agreement.

As of March 31, 2020, in connection with Amendment No. 16, we have accrued deferred ticking fee costs of $6.7 million due to certain required actions that were not completed by December 15, 2019.

At March 31, 2020, borrowings under the U.S. Revolving Credit Facility consisted of $185.0 million at a weighted average interest rate of 8.92%. Usage under the U.S. Revolving Credit Facility consisted of $185.0 million of revolving loan borrowings, $25.5 million of financial letters of credit and $97.6 million of performance letters of credit. At March 31, 2020, we had approximately $22.2 million available to meet letter of credit requirements based on our overall facility size, of which $20.0 million was available for additional borrowings under our sublimit.

On May 14, we entered into an agreement amending and restating the Amended Credit Agreement, as more fully described in Note 23. On May 14, B. Riley provided the B. Riley Guaranty of the U.S. Revolving Credit Facility, as more fully described in Note 23.

Backstop Commitment Letter

On January 31, 2020, the Company also entered into a letter agreement with B. Riley (the "Backstop Commitment Letter"), a related party, pursuant to which B. Riley agreed to fund any shortfall in the $200.0 million of new debt or equity financing required as part of the terms of the refinancing to the extent such amounts have not been raised from third parties and convert, or cause its applicable affiliates to convert, term loans into equity to the extent necessary to comply with the indebtedness limit of $275.0 million if the Company was unable to secure third parties to fund a sufficient amount of financing through the issuance of equity. In connection with the Company's entry into the A&R Credit Agreement (including B. Riley's commitment to provide the Company with up to $70.0 million of additional Last Out Term Loans), the B. Riley Guaranty, and the related transactions, the Company and B. Riley agreed to terminate the Backstop Commitment Letter, which letter was intended to support the Company’s efforts to refinance its existing indebtedness. See Note 23 for further details.

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

23





aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of March 31, 2020 and December 31, 2019 was $82.1 million and $88.5 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 $31.1 million as of March 31, 2020. Of the letters of credit issued under the U.S. Revolving Credit Facility, $33.8 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 March 31, 2020, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $220.1 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:
 
March 31, 2020
(in thousands)
A-3
A-4
Total
Proceeds (1)
$
101,660

$
30,000

$
131,660

Discount and fees
8,650


8,650

Paid-in-kind interest
3,020


3,020

Principal
113,330

30,000

143,330

Unamortized discount and fees
(7,227
)

(7,227
)
Net debt balance
$
106,103

$
30,000

$
136,103

(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment of the tranche as of July 23, 2019, the date of the Equitization Transactions.
 
December 31, 2019
(in thousands)
A-3
Proceeds (1)
$
101,660

Discount and fees
8,650

Paid-in-kind interest
3,020

Principal
113,330

Unamortized discount and fees
(9,377
)
Net debt balance
$
103,953

(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment of the tranche as of July 23, 2019, the date of the Equitization Transactions.

Last Out Term Loans are incurred under our A&R 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 as the U.S. Revolving Credit Facility. In connection with Amendment No. 16 of the Amended Credit Agreement, the maturity date for all Last Out Term Loans was extended to December 31, 2020 and was further extended to December 30, 2022 upon the effectiveness of the A&R Credit Agreement.

The total effective interest rate of Tranche A-3 was 20.7% on March 31, 2020. The total effective interest rate of Tranche A-4 was 12.0% on March 31, 2020. The interest rate on the Last Out Term Loans under the A&R Credit Agreement is a fixed rate per annum of 12.0%. Interest expense associated with the Last Out Term Loans is detailed in Note 15.


24





Tranche A-1

We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley, a related party, in September and October of 2018. In November 2018, Tranche A-1 was assigned to Vintage, also a related party. As part of the Equitization Transactions in July 2019, the outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest remaining as of March 31, 2019 was exchanged for shares of common stock.

Tranche A-2

We borrowed $10.0 million of net proceeds under Tranche A-2 of Last Out Term Loans from B. Riley, a related party in March 2019. Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions in July 2019.

Tranche A-3

Under Amendment No. 16 to our Amended Credit Agreement, 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.

Interest rates for Tranche A-3 are described above. Tranche A-3 may be prepaid, subject to the subordination provisions under the Amended Credit Agreement as described above, but not re-borrowed. As part of the Equitization Transactions, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million. The Tranche A-3 maturity date was previously extended to December 31, 2020 and was extended to December 30, 2022 upon the effectiveness of the A&R Credit Agreement.

Tranche A-4

On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides $30.0 million of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans. The proceeds from Tranche A-4 may be used under the terms of Amendment No. 20 to repay revolving credit loans, for working capital and general corporate purposes, and to reimburse certain expenses of B. Riley as specified by Amendment No. 20.  The terms of Tranche A-4 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.

As of January 31, 2020, we borrowed $30.0 million face value of the Tranche A-4 and received net proceeds of $26.3 million after incurring total fees of $3.7 million related to Amendment No, 20 described above. The Tranche A-4 maturity date was previously extended to December 31, 2020 and was further extended to December 30, 2022 upon the effectiveness of the A&R Credit Agreement.

Tranche A-5

On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The terms of Tranche A-5 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement. As of May 15, 2020, no borrowings have occurred under Tranche A-5.

Tranche A-6

The A&R Credit Agreement provided us with up to $65 million of additional funding in the form of Tranche A-6 Last Out Term Loans from B. Riley, a related party, as more fully described in Note 23. An aggregate $30 million of this new commitment was funded upon execution of the A&R Credit Agreement. The $35 million remaining will be funded in installments, subject to reduction for the gross proceeds from certain equity offerings conducted by the Company.

On May 14, 2020, we borrowed $30 million face value of the Tranche A-6 and received gross proceeds of $30 million related to the A&R Credit Agreement that is more fully described in Note 23. The Tranche A-6 maturity date is December 30, 2022.

Tranche A-7


25





The A&R Credit Agreement provided us with up to $5 million of additional funding in the form of Tranche A-7 Last Out Term Loans from B. Riley, a related party, as more fully described in Note 23. The $5 million will be available upon request by the Company, subject to certain limitations. As of May 15, 2020, no borrowings have occurred under Tranche A-7. The Tranche A-7 maturity date is December 30, 2022.

NOTE 15 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION

Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
 
Three months ended March 31,
(in thousands)
2020
2019
Components associated with borrowings from:
 
 
U.S. Revolving Credit Facility
$
4,039

$
3,550

Last Out Term Loans - cash interest
4,048

513

Last Out Term Loans - paid-in-kind interest

1,060

 
8,087

5,123

Components associated with amortization or accretion of:
 
 
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
9,035

5,270

U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16 (1)
1,658


Last Out Term Loans - discount and financing fees
2,150

590

 
12,843

5,860

 
 
 
Other interest expense
1,161

151

 
 
 
Total interest expense
$
22,091

$
11,134

(1) 
An incremental monthly fee of 1.0% of total availability of the U.S. Revolving Credit Facility shall be earned on the 15th day of each month and is payable on the earlier of March 15, 2020 or the last day of the Availability Period with respect to the U.S. Revolving Credit Facility.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the Condensed Consolidated Balance Sheets that sum to the total of the same amounts in the Condensed Consolidated Statements of Cash Flows:
(in thousands)
March 31, 2020
December 31, 2019
March 31, 2019
December 31, 2018
Held by foreign entities
$
27,937

$
38,921

$
26,746

$
35,522

Held by U.S. entities
7,447

4,851

16,781

7,692

Cash and cash equivalents of continuing operations
35,384

43,772

43,527

43,214

 
 
 
 
 
Reinsurance reserve requirements
5,779

9,318

2,841

11,768

Restricted foreign accounts
3,107

3,851

4,118

5,297

Bank guarantee collateral
2,115




Restricted cash and cash equivalents
11,001

13,169

6,959

17,065

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows
$
46,385

$
56,941

$
50,486

$
60,279


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.


26





The following cash activity is presented as a supplement to our Condensed Consolidated Statements of Cash Flows and is included in Net cash used in activities:
 
Three months ended March 31,
(in thousands)
2020
2019
Income tax payments (refunds), net
$
793

$
(78
)
 
 
 
Interest payments on our U.S. Revolving Credit Facility
$
4,150

$
2,403

Interest payments on our Last Out Term Loans
4,038

540

Total cash paid for interest
$
8,188

$
2,943


NOTE 16 – PROVISION FOR INCOME TAXES

In the three months ended March 31, 2020, income tax benefit was $0.8 million, resulting in an effective tax rate of 2.4%.

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

We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the U.S. federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom with statutory 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 have tax regimes that vary with respect to both nominal rates and the basis on which those rates are applied. Our consolidated effective income tax rate can vary significantly from period to period due to these variations, changes in the jurisdictional mix of our income, and valuation allowances recognized in jurisdictions that have a net deferred tax asset balance.

Our effective tax rate for the three months ended March 31, 2020 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 tax expense primarily reflects withholding taxes or state and local income taxes in state taxing regimes which impose a taxable income limitation. In the three months ended March 31, 2020, we separately allocated $0.6 million of income tax expense to income from discontinued operations due to the intraperiod allocation rules of ASC 740-20-45-7. Our income tax expense (benefit) also reflects changes in the jurisdictional mix of income and losses. In other profitable jurisdictions, however, we may record income tax expense, even though we have established a full valuation allowance against our net deferred tax assets. We have favorable discrete items of $0.5 million in the three months ended March 31, 2020 and $0.2 million in the three months ended March 31, 2019.

CARES Act

On March 27, 2020, the President of the United States signed into law the CARES Act. The CARES Act, among other things, includes modifications to the Internal Revenue Code ("IRC") intended to provide economic relief to those impacted by the COVID-19 pandemic; however, these benefits do not significantly impact the Company's tax provision.

NOTE 17 – CONTINGENCIES

Litigation Relating to Boiler Installation and Supply Contract

On December 27, 2019, a complaint was filed against Babcock & Wilcox by P.H. Glatfelter Company (“Glatfelter”) in the United States District Court for the Middle District of Pennsylvania, Case No. 1:19-cv-02215-JPW, alleging claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment (the “Glatfelter Litigation”). The complaint alleges damages in excess of $58.9 million. We are evaluating Glatfelter’s claims as well as potential counter claims against Glatfelter and intend to vigorously defend against the action. However, given the preliminary stage of the litigation, it is too early to determine if the outcome of the Glatfelter Litigation will have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows.


27





SEC Investigation

The U.S. SEC is conducting a formal investigation of the Company, focusing on the accounting charges and related matters involving the Company's Vølund and Other Renewable segment from 2015-2019. The SEC has served multiple subpoenas on the Company for documents. The Company is cooperating with the SEC related to the subpoenas and investigation. The Company is still in the process of producing documents to the SEC. In addition, the SEC has taken testimony from past and current officers and directors and has requested additional testimony from present and former employees. It is reasonably possible that the SEC may bring one or more claims against the Company and certain individuals. Due to the stage of the investigation, we are unable to estimate the amount of loss or range of potential loss of any claim. However, there can be no assurance that such claims will not have a material impact on the Company.

Subsequent Event - Stockholder Derivative and Class Action Litigation

On April 14, 2020, a putative B&W stockholder (“Plaintiff”) filed a derivative and class action complaint against certain of the Company’s directors (current and former), executives and significant stockholders (“Defendants”) and the Company (as a nominal defendant). The action was filed in the Delaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF. Plaintiff alleges that Defendants, among other things, did not properly discharge their fiduciary duties in connection with the 2019 rights offering and related transactions. The Company is evaluating Plaintiff’s claims and intends 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 condensed consolidated financial condition, results of operations or cash flows.

28






NOTE 18 – COMPREHENSIVE INCOME

Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the three months ended March 31, 2020 and 2019 were as follows:
(in thousands)
Currency translation
gain
Net unrecognized loss related to benefit plans (net of tax)
Total
Balance at December 31, 2019
$
5,743

$
(3,817
)
$
1,926

Other comprehensive income (loss) before reclassifications
2,380


2,380

Reclassified from AOCI to net income (loss)

(246
)
(246
)
Net other comprehensive income (loss)
2,380

(246
)
2,134

Balance at March 31, 2020
$
8,123

$
(4,063
)
$
4,060


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

The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
AOCI component
Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI
Three months ended March 31,
2020
2019
Derivative financial instruments
Other – net

(289
)
 
Provision for income taxes

(65
)
 
Net loss
$

$
(224
)
 
 
 
 
Amortization of prior service cost on benefit obligations
Benefit plans, net
$
246

$
356

 
Provision for income taxes


 
Net income
$
246

$
356



29





NOTE 19 – FAIR VALUE MEASUREMENTS

The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic, Fair Value Measurements and Disclosures).
(in thousands)
 
 
 
Available-for-sale securities
March 31, 2020
Level 1
Level 2
Corporate notes and bonds
$
8,689

$
8,689

$

Mutual funds
528


528

United States Government and agency securities
6,442

6,442


Total fair value of available-for-sale securities
$
15,659

$
15,131

$
528


(in thousands)
 
 
 
Available-for-sale securities
December 31, 2019
Level 1
Level 2
Corporate notes and bonds
$
8,310

$
8,310

$

Mutual funds
587


587

United States Government and agency securities
3,868

3,868


Total fair value of available-for-sale securities
$
12,765

$
12,178

$
587


Available-For-Sale Securities

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

Derivatives

Derivative assets and liabilities usually consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. As of March 31, 2020, 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 March 31, 2020 and December 31, 2019.
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.

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Tests for impairment annually and when impairment indicators exist require significant fair value measurements using unobservable inputs (see Note 7). The fair values of the reporting units were based on an income approach using a discounted cash flow analysis, a market approach using multiples of revenue and EBITDA of guideline companies, and a market approach using multiples of revenue and EBITDA from recent, similar business combinations.

Property, plant and equipment and definite-lived intangible asset amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined based on an income approach using a discounted cash flow analysis or based on the price that the Company expects to receive upon the sale of these assets. Both of those approaches utilize unobservable inputs (see Note 8 and Note 6).

NOTE 20 – RELATED PARTY TRANSACTIONS

The Letter Agreement entered into 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, between B. Riley, 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. On April 30, 2019, the Company entered into an Investor Rights Agreement with B. Riley and Vintage providing the governance rights contemplated by the Letter Agreement. The Company also entered into a Registration Rights Agreement with B. Riley and Vintage on April 30, 2019 providing each with certain customary registration rights for the shares of our common stock that they hold.

Transactions with B. Riley

Based on its Schedule 13D filings, B. Riley beneficially owns 17.8% of our outstanding common stock as of March 31, 2020.

B. Riley is party to the Last Out Term Loans as described in Note 14. B. Riley has also provided the B. Riley Guaranty as more fully described in Note 23.

We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, 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 BRPI Executive Consulting, LLC. In June 2019, we granted a total of $2.0 million in cash bonuses to BRPI Executive Consulting LLC for Mr. Young's performance and services.

Total fees associated with B. Riley related to the Last Out Term Loans and services of Mr. Kenny Young, both as described above, were $4.2 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.

Refer to Note 23 for additional related party transactions with B. Riley and its affiliates subsequent to March 31, 2020.

Transactions with Vintage Capital Management, LLC

Based on its Schedule 13D filings, Vintage beneficially owns 33.9% of our outstanding common stock as of March 31, 2020.


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NOTE 21 – ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS

Assets Held for Sale

In December 2019, we determined that a small business within the Babcock & Wilcox segment met the criteria to be classified as held for sale. Assets and liabilities held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. At March 31, 2020, the carrying value of the assets held for sale approximated the estimated fair value less costs to sell, therefore an impairment charge was not recorded. The divestiture of the business held for sale could result in a gain or loss on sale to the extent the ultimate selling price differs from the current carrying value of the net assets recorded. The sale is expected to occur in 2020.

The following table summarizes the carrying value of the assets and liabilities held for sale at March 31, 2020 and December 31, 2019:
(in thousands)
March 31, 2020
December 31, 2019
Accounts receivable – trade, net
$
4,133

$
5,472

Accounts receivable – other
143

147

Contracts in progress
580

586

Inventories
1,884

1,555

Other current assets
298

329

     Current assets held for sale
7,038

8,089

 
 
 
Net property, plant and equipment
6,444

6,534

Intangible assets
711

725

Right-of-use-asset
24

63

Other assets
20


     Non-current assets held for sale
7,199

7,322

 
 
 
Total assets held for sale
$
14,237

$
15,411

 
 
 
Accounts payable
$
6,340

$
7,898

Accrued employee benefits
495

430

Advance billings on contracts
353

227

Accrued warranty expense
509

515

Operating lease liabilities
3

6

Other accrued liabilities
586

462

     Current liabilities held for sale
8,286

9,538

 
 
 
     Non-current liabilities held for sale
36


 
 
 
Total liabilities held for sale
$
8,322

$
9,538


Divestitures

On March 17, 2020, we fully settled the remaining escrow associated with the sale of PBRRC and received $4.5 million in cash.


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Discontinued Operations- subsequent event

On April 6, 2020, we fully settled the remaining escrow associated with the sale of the MEGTEC and Universal businesses and received $3.5 million in cash.

NOTE 22 – NEW ACCOUNTING STANDARDS

We adopted the following new accounting standard during the first quarter of 2020:

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. The impact of this standard on our condensed consolidated financial statements was immaterial.

New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this update are effective for all entities upon issuance and may be adopted any date on or after March 12, 2020 up to December 31, 2022. We are currently evaluating the impact of the standard on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing exceptions related to the incremental approach for intra-period tax allocation, certain deferred tax liabilities, and the general methodology for calculating income taxes in an interim period. The amendment also provides simplification related to accounting for franchise (or similar) tax, evaluating the tax basis step up of goodwill, allocation of consolidated current and deferred tax expense, reflection of the impact of enacted tax law or rate changes in annual effective tax rate calculations in the interim period that includes enactment date, and other minor codification improvements. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods in which financial statements have not yet been issued. We are currently evaluating the impact of the standard on our condensed consolidated financial statements.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses. This update is an amendment to the new credit losses standard, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that was issued in June 2016 and clarifies that operating lease receivables are not within the scope of Topic 326. The new credit losses standard changes the accounting for credit losses for certain instruments. The new measurement approach is based on expected losses, commonly referred to as the current expected credit loss (CECL) model, and applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance sheet credit exposures, such as loan commitments. The standard also changes the impairment model for available-for-sale debt securities. The provisions of this standard will primarily impact the allowance for doubtful accounts on our trade receivables, contracts in progress, and potentially our impairment model for available-for-sale debt securities (to the extent we have any upon adoption). For public, smaller reporting companies, this standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of both standards on our condensed consolidated financial statements.


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NOTE 23 – SUBSEQUENT EVENTS

COVID-19 Response

As part of the Company’s recent response to the impact of the COVID-19 pandemic on its business, the Company is taking certain cash conservation and cost reduction measures announced in April 2020. These measures include temporary payroll reductions and unpaid furloughs for certain employees, suspending the Company's 401(k) match for U.S. employees for the remainder of 2020, temporarily deferring the monthly fee paid to BRPI Executive Consulting, LLC for the services of our Chief Executive Officer by 50%, and deferrals of the base salaries of our Chief Strategy Officer by 50%, Chief Financial Officer by 30% and our Senior Vice President of The Babcock & Wilcox Company by 30%.  The Company’s Board also approved a temporary deferral of 50% of the cash compensation payable to non-employee directors under the Company’s board compensation program to be paid during the first quarter of 2021. The Company has also negotiated or is in the process of negotiating temporary rent payment deferrals related to leased facilities located in the U.S., Canada, Italy and Denmark and is exploring options for government loans and programs in the U.S. and abroad that would be appropriate and available.

The Company continues to analyze its cost structure and may implement additional cost reduction measures as may be necessary due to the on-going economic challenges resulting from the COVID-19 pandemic.

Debt Refinancing

Entry into A&R Credit Agreement

On May 14, 2020, we entered into an agreement with our lenders amending and restating the Amended Credit Agreement.  The A&R Credit Agreement refinances and extends the maturity of our revolving credit facility and Last Out Term Loans.

Under the A&R Credit Agreement, B. Riley has committed to provide the Company with up to $70.0 million of additional Last Out Term Loans on the same terms as the term loans extended under the Amended Credit Agreement. An aggregate $30.0 million of this new commitment was funded upon execution of the A&R Credit Agreement. Of the remaining commitments, at least $35.0 million will be funded in installments, subject to reduction for the gross proceeds from certain equity offerings conducted by the Company, and $5.0 million will be funded upon request by the Company. The proceeds from the $30.0 million of new term loans will be used to pay transaction fees and expenses and repay outstanding borrowings under the revolving credit facility governed by the A&R Credit Agreement (the "revolving credit facility"). Proceeds from the additional $40.0 million of term loans will be used to repay outstanding borrowings under the revolving credit facility, with any remaining amounts used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.

The A&R Credit Agreement also provides that, (i) the revolving credit facility continues to be available for issuances of existing and new letters of credit, subject to the L/C Sublimit (as defined below), (ii) the $205 million sublimit on borrowings under the revolving credit facility is maintained, and (iii) interest payments on the unpaid principal amount of revolving credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 are deferred and will be paid in six equal installments on the last business day of each calendar month beginning on January 29, 2021 and through June 30, 2021. No swing line borrowings are permitted under the A&R Credit Agreement.

The A&R Credit Agreement also amends the following terms, among others, as compared with the Amended Credit Agreement:
(i)
the maturity date of the revolving credit facility will be extended to June 30, 2022, and the maturity date of all Last Out Term Loans under the A&R Credit Agreement will be extended to December 30, 2022 (six months after the maturity date of the revolving credit facility);

(ii)
the interest rate for loans under the revolving credit facility will be reduced to LIBOR plus 7.0% or base rate (as defined in the A&R Credit Agreement) plus 6.0%. These margins will be reduced by 2.0% if commitments under the revolving credit facility are reduced to less than $200.0 million. The fee for letters of credit will be set at 4.0%;

(iii)
the interest rate for all Last Out Term Loans will be set at 12.0%;


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(iv)
the commitments under the revolving credit facility will automatically and permanently decrease in the following amounts on the following dates, which match the funding dates and amounts for the committed term loans: (x) $10.0 million on November 30, 2020; and (y) $5.0 million on each of March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022, respectively;

(v)
the amount of revolving loans and letters of credit available in currencies other than U.S. dollars will be capped at $125.0 million through April 30, 2021 and step down to $110.0 million on May 1, 2021; and

(vi)
the amount of financial letters of credit will be capped at $75.0 million, and the amount of all letters of credit will be capped at $190.0 million through April 30, 2021 and step down to $175.0 million on May 1, 2021 (the “L/C Sublimit”).

Affirmative and negative covenants under the A&R Credit Agreement are substantially consistent with the Amended Credit Agreement, except that, among other changes: (i) the indebtedness covenant has been modified to permit the incurrence of any governmental assistance in the form of indebtedness in connection with COVID-19 relief in an aggregate principal amount not to exceed $10.0 million; (ii) a third-party letter of credit basket of up to $50.0 million has been added; (iii) certain liens and restricted payments are modified to permit liens and repayments of indebtedness incurred in connection with governmental assistance in connection with COVID-19 relief; and (iv) covenants related to the European Vølund EPC loss projects have been removed. The minimum required liquidity condition of $30.0 million remains constant, but has been modified to exclude cash of non-loan parties in an amount in excess of $25.0 million. Certain financial covenant testing has been suspended through September 30, 2020, with the Company and the Administrative Agent having agreed to renegotiate such covenant levels and related definitions prior to October 31, 2020.

Events of default under the A&R Credit Agreement are substantially consistent with the Amended Credit Agreement, except that: (i) B. Riley’s failure to fund any of its additional Last Out Term Loans committed under the A&R Credit Agreement will constitute an event of default; and (ii) the failure to renegotiate and set certain financial covenant testing levels and related definitions prior to October 31, 2020 will constitute an event of default.

In connection with the A&R Credit Agreement, the Company will incur certain customary amendment and commitment fees, a portion of which will be deferred pursuant to the terms of the A&R Credit Agreement along with certain previously deferred fees incurred under the Amended Credit Agreement.

B. Riley Limited Guaranty

In connection with the Company’s entry into the A&R Credit Agreement, B. Riley has agreed to enter into the B. Riley Guaranty for the benefit of the Administrative Agent and the lenders under the revolving credit facility. The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations with respect to the revolving credit facility (other than with respect to letters of credit and contingent obligations), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees. The B. Riley Guaranty is enforceable in certain circumstances, including, among others: (i) B. Riley’s failure to timely fund in full any of its additional Last Out Term Loans committed under the A&R Credit Agreement; (ii) certain events of default relating to bankruptcy or insolvency occurring with respect to B. Riley; (iii) the acceleration of the Company’s borrowings under the revolving credit facility; (iv) the Company’s failure to pay any amount due to the Administrative Agent or any lender under the revolving credit facility; or (v) any assertion that the B. Riley Guaranty or any portion thereof is not valid, binding or enforceable.
In connection with the B. Riley Guaranty, the Company entered into a fee letter with B. Riley pursuant to which the Company agreed to pay B. Riley a fee of $3.9 million (the “B. Riley Guaranty Fee”).

Fee and Interest Equitization Agreement

In connection with the B. Riley Guaranty, the Company entered into a Fee and Interest Equitization Agreement (the “Equitization Agreement”) with B. Riley and, solely for certain limited purposes under the Equitization Agreement, B. Riley FBR, Inc.

The Equitization Agreement provides that, in lieu of receiving (a) $12.343 million of interest payments with respect to Last Out Term Loans under the A&R Credit Agreement between May 14, 2020 and December 31, 2020 (the “Equitized Interest Payments”) and (b) the B. Riley Guaranty Fee (the “Equitized Fee Payment” and, together with the Equitized Interest

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Payments, the “Equitized Fees and Interest Payments”), B. Riley will receive shares of the Company’s common stock, par value $0.01 per share (“common stock”).