BABCOCK & WILCOX ENTERPRISES, INC.
The following table sets forth the computation of basic and diluted earnings per share of our common stock:stock, net of non-controlling interest:
Renewable segment: focused on•Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the supplypower generation, oil and gas, and industrial sectors. B&W has an extensive global base of steam-generating systems, environmental and auxiliaryinstalled equipment for the waste-to-energyutilities and biomass power generation industries.general industrial applications including refining, petrochemical, food processing, metals and others.
Industrial segment: focused on custom-engineered cooling, environmental and other industrial equipment along with related aftermarket services.9
Revenues exclude eliminations of Contents
revenues generated from sales to other segments or to other product lines within the segment. An analysis of our operations by segment is as follows:
| | | | | | | | | | |
| | Three months ended March 31, |
(in thousands) | | | 2021 | 2020 |
Revenues: | | | | |
B&W Renewable segment | | | | |
B&W Renewable | | | $ | 17,997 | | $ | 22,338 | |
Vølund | | | 10,814 | | 13,661 | |
| | | 28,811 | | 35,999 | |
B&W Environmental segment | | | | |
B&W Environmental | | | 17,433 | | 12,935 | |
SPIG | | | 11,184 | | 11,337 | |
GMAB | | | 2,543 | | 1,648 | |
| | | 31,160 | | 25,920 | |
B&W Thermal segment | | | | |
B&W Thermal | | | 108,281 | | 86,683 | |
| | | 108,281 | | 86,683 | |
| | | | |
Other | | | (4) | | (48) | |
| | | $ | 168,248 | | $ | 148,554 | |
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 |
Revenues: | | | | | |
Power segment | $ | 202,222 |
| $ | 211,749 |
| | $ | 612,274 |
| $ | 762,293 |
|
Renewable segment | 108,557 |
| 124,344 |
| | 262,168 |
| 293,593 |
|
Industrial segment | 99,288 |
| 76,809 |
| | 281,734 |
| 147,275 |
|
Eliminations | (1,364 | ) | (1,947 | ) | | (6,540 | ) | (4,882 | ) |
| 408,703 |
| 410,955 |
| | 1,149,636 |
| 1,198,279 |
|
Gross profit: | | | | | |
Power segment | 40,629 |
| 48,896 |
| | 132,653 |
| 170,903 |
|
Renewable segment | 181 |
| 18,592 |
| | (100,119 | ) | 14,468 |
|
Industrial segment | 9,461 |
| 14,601 |
| | 34,240 |
| 33,506 |
|
Intangible amortization expense included in cost of operations | (2,984 | ) | (7,752 | ) | | (11,455 | ) | (8,833 | ) |
Mark to market loss included in cost of operations | — |
| (580 | ) | | (954 | ) | (30,079 | ) |
| 47,287 |
| 73,757 |
| | 54,365 |
| 179,965 |
|
Selling, general and administrative ("SG&A") expenses | (59,225 | ) | (59,615 | ) | | (192,742 | ) | (179,225 | ) |
Goodwill impairment charges | (86,903 | ) | — |
| | (86,903 | ) | — |
|
Restructuring activities and spin-off transaction costs | (3,775 | ) | (2,395 | ) | | (8,910 | ) | (38,021 | ) |
Research and development costs | (2,291 | ) | (2,361 | ) | | (7,454 | ) | (8,273 | ) |
Intangible amortization expense included in SG&A | (1,016 | ) | (1,018 | ) | | (2,999 | ) | (3,071 | ) |
Mark to market loss included in SG&A | — |
| (64 | ) | | (106 | ) | (465 | ) |
Equity in income of investees | 1,234 |
| 2,827 |
| | 4,813 |
| 4,887 |
|
Impairment of equity method investment | — |
| — |
| | (18,193 | ) | — |
|
Gains (losses) on asset disposals, net | (59 | ) | 2 |
| | (63 | ) | 17 |
|
Operating income (loss) | $ | (104,748 | ) | $ | 11,133 |
| | $ | (258,192 | ) | $ | (44,186 | ) |
DuringThe presentation of the first halfcomponents of 2017, we announced our planadjusted 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 costs, impairments, losses on debt extinguishment, costs related to reclassify the Industrial Steam product line currently included infinancial consulting required under our PowerU.S. Revolving Credit Facility, research and development costs and other costs that may not be directly controllable by segment management are not allocated to the Industrialsegments.
Adjusted EBITDA for each segment beginningis presented below with the quarter ended September 30, 2017. We have indefinitely postponed that reorganization. As of September 30, 2017, the Industrial Steam product line remains in the Power segment for all periods presented.a reconciliation to net income (loss) attributable to stockholders.
| | | | | | | | | | |
| | Three months ended March 31, |
(in thousands) | | | 2021 | 2020 |
Adjusted EBITDA (1) | | | | |
B&W Renewable segment | | | $ | 204 | | $ | (1,434) | |
B&W Environmental segment | | | 1,101 | | 270 | |
B&W Thermal segment | | | 10,430 | | 7,606 | |
Corporate | | | (2,685) | | (4,143) | |
Research and development costs | | | (588) | | (1,341) | |
| | | 8,462 | | 958 | |
| | | | |
Restructuring activities | | | (993) | | (1,951) | |
Financial advisory services | | | (933) | | (929) | |
Advisory fees for settlement costs and liquidity planning | | | (1,978) | | (2,614) | |
Litigation legal costs | | | (380) | | (696) | |
Stock compensation | | | (7,829) | | (712) | |
Interest on letters of credit included in cost of operations | | | (286) | | (152) | |
Loss from business held for sale | | | (483) | | (788) | |
Depreciation & amortization | | | (4,058) | | (4,208) | |
Gain (loss) from a non-strategic business | | | 12 | | (121) | |
Gain on asset disposals, net | | | 2,004 | | 915 | |
Operating loss | | | (6,462) | | (10,298) | |
Interest expense, net | | | (14,114) | | (22,051) | |
Gain on sale of business | | | 358 | | 0 | |
Net pension benefit | | | 9,098 | | 7,536 | |
Foreign exchange | | | (1,209) | | (9,326) | |
Other – net | | | (278) | | (206) | |
Total other income (expense) | | | (6,145) | | (24,047) | |
Loss before income tax (benefit) expense | | | (12,607) | | (34,345) | |
Income tax (benefit) expense | | | 2,836 | | (810) | |
Loss from continuing operations | | | (15,443) | | (33,535) | |
Income from discontinued operations, net of tax | | | 0 | | 1,913 | |
Net loss | | | (15,443) | | (31,622) | |
Net (income) loss attributable to non-controlling interest | | | (21) | | 96 | |
Net loss attributable to stockholders | | | $ | (15,464) | | $ | (31,526) | |
NOTE 4 – UNIVERSAL ACQUISITION
On January 11, 2017, we acquired Universal Acoustic & Emission Technologies, Inc. ("Universal") for approximately $52.5 million in cash, funded primarily by borrowings under our United States revolving credit facility, net of $4.4 million cash acquired in the business combination. Transaction costs included in the purchase price were approximately $0.2 million. We accounted(1) Adjusted EBITDA for the Universal acquisition using the acquisition method, whereby all of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill. In order to purchase Universal on January 11, 2017, we borrowed approximately $55.0 million under the United States revolving credit facility in 2017.
Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures. At the acquisition date, Universal employed approximately 460 people, mainly in the United States and Mexico. During 2017, we integrated Universal with our Industrial segment. Universal contributed $16.0 million and $49.8 million of revenue to our operating results during the three and nine months ended September 30, 2017, respectively. Universal contributed $3.2 millionMarch 31, 2020, excludes losses related to a non-strategic business and $10.0 millioninterest on letters of gross profit (excluding intangible asset amortization expense of $0.5 million and $2.6 million) to our operating results in the three and nine months ended
September 30, 2017, respectively. We expect Universal to contribute over $70.0 million of revenue and be accretive to the Industrial segment's gross profit during 2017.
The allocation of the purchase price based on the estimated fair value of assets acquired and liabilities assumed is set forth below. We are in the process of finalizing the purchase price allocation associated with the valuation of certain intangible assets and deferred tax balances; as a result, the provisional measurements of intangible assets, goodwill and deferred income tax balances are subject to change. Purchase price adjustments are expected to be finalized by December 31, 2017.
|
| | | |
(in thousands) | Estimated acquisition date fair value |
Cash | $ | 4,379 |
|
Accounts receivable | 11,270 |
|
Contracts in progress | 3,167 |
|
Inventories | 4,585 |
|
Other assets | 579 |
|
Property, plant and equipment | 16,692 |
|
Goodwill | 14,413 |
|
Identifiable intangible assets | 19,500 |
|
Deferred income tax assets | 935 |
|
Current liabilities | (10,833 | ) |
Other noncurrent liabilities | (1,423 | ) |
Deferred income tax liabilities | (6,338 | ) |
Net acquisition cost | $ | 56,926 |
|
The intangible assets included above consist of the following: |
| | | | | |
| Estimated fair value (in thousands) | | Weighted average estimated useful life (in years) |
Customer relationships | $ | 10,800 |
| | 15 |
Backlog | 1,700 |
| | 1 |
Trade names / trademarks | 3,000 |
| | 20 |
Technology | 4,000 |
| | 7 |
Total amortizable intangible assets | $ | 19,500 |
| | |
The acquisition of Universal resulted in an increase in our intangible asset amortization expense during the three and nine months ended September 30, 2017 of $0.5 million and $2.6 million, respectively, which iscredit included in cost of operations that were previously included in Adjusted EBITDA and total $(0.1) million and $(0.2) million, respectively.
We do not separately identify or report our condensed consolidated statement of operations. Amortization of intangible assets by segment as our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is notmeasured.
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 segment results.each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Approximately $0.1 millionRevenue from goods and $1.5 million of acquisitionservices transferred to customers at a point in time, which includes certain aftermarket parts and integration related costs of Universal was recorded as a componentservices, accounted for 27% and 31% of our operating expenses in the condensed consolidated statement of operations in the three and nine months ended September 30, 2017, respectively.
The following unaudited pro forma financial information below represents our results of operationsrevenue for the three and nine months ended September 30, 2016March 31, 2021 and 122020, respectively. Revenue from products and services transferred to customers over time, which primarily relates to customized, engineered solutions and construction services, accounted for 73% and 69% of our revenue for the three months ended DecemberMarch 31, 2016 had2021 and 2020, respectively.
Refer to Note 3 for our disaggregation of revenue by product line.
Contract Balances
The following represents the Universal acquisition occurred on January 1, 2016. The unaudited pro forma financial information below is not intended to represent or be indicativecomponents of our actual consolidated resultscontracts in progress and advance billings on contracts included in our Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
(in thousands) | March 31, 2021 | December 31, 2020 | $ Change | % Change |
Contract assets - included in contracts in progress: | | | | |
Costs incurred less costs of revenue recognized | $ | 27,096 | | $ | 25,888 | | $ | 1,208 | | 5 | % |
Revenues recognized less billings to customers | 39,137 | | 33,420 | | 5,717 | | 17 | % |
Contracts in progress | $ | 66,233 | | $ | 59,308 | | $ | 6,925 | | 12 | % |
Contract liabilities - included in advance billings on contracts: | | | | |
Billings to customers less revenues recognized | $ | 80,328 | | $ | 61,884 | | $ | 18,444 | | 30 | % |
Costs of revenue recognized less cost incurred | 1,425 | | 2,118 | | (693) | | (33) | % |
Advance billings on contracts | $ | 81,753 | | $ | 64,002 | | $ | 17,751 | | 28 | % |
| | | | |
Net contract balance | $ | (15,520) | | $ | (4,694) | | $ | (10,826) | | 231 | % |
| | | | |
Accrued contract losses | $ | 453 | | $ | 582 | | $ | (129) | | (22) | % |
Backlog
On March 31, 2021 we had $535.0 million of remaining performance obligations, which we completed the acquisition at January 1, 2016. This information should not be takenalso refer to as representativetotal backlog. We expect to recognize approximately 51.0%, 18.7% and 30.3% of our future consolidated results of operations.
|
| | | | | | | | | |
| Three months ended | Nine months ended | Twelve months ended |
(in thousands) | September 30, 2016 | September 30, 2016 | December 31, 2016 |
Revenues | $ | 431,412 |
| $ | 1,259,905 |
| $ | 1,660,986 |
|
Net income (loss) attributable to B&W | 8,903 |
| (43,458 | ) | (113,940 | ) |
Basic earnings per common share | 0.18 |
| (0.86 | ) | (2.27 | ) |
Diluted earnings per common share | 0.18 |
| (0.86 | ) | (2.27 | ) |
The unaudited pro forma results includedremaining performance obligations as revenue in the table above reflect the following pre-tax adjustments to our historical results:
A net increase in amortization expense related to timingremainder of amortization of the fair value of identifiable intangible assets acquired of $0.5 million, $2.4 million2021, 2022 and $2.8 million in the three and nine months ended September 30, 2016 and the 12 months ended December 31, 2016,thereafter, respectively.
Elimination of the historical interest expense recognized by Universal of $0.1 million, $0.3 million and $0.4 million in the three and nine months ended September 30, 2016 and the 12 months ended December 31, 2016, respectively.
Elimination of $2.1 million in transaction related costs recognized in the 12 months ended December 31, 2016.
NOTE 5 – CONTRACTS AND REVENUE RECOGNITION
We generally recognize revenues and related costs from long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as work progresses and reflect adjustments in profit proportionate to the percentage of completion in the periods in which we revise estimates to complete the contract. To the extent that these adjustments result in a reduction of previously reported profits from a project, we recognize a charge against current earnings. If a contract is estimated to result in a loss, that loss is recognized in the current period as a charge to earnings and the full loss is accrued on our balance sheet, which results in no expected gross profit from the loss contract in the future unless there are revisions to our estimated revenues or costs at completion in periods following the accrual of the contract loss. Changes in the estimated results of our percentage-of-completion contracts are necessarily based on information available at the time that the estimates are made and are based on judgments that are inherently uncertain as they are predictive in nature. As with all estimates to complete used to measure contract revenue and costs, actual results can and do differ from our estimates made over time.Contract Estimates
In the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completionover time basis, which are summarized as follows:
| | | | | | | | | | |
| | Three months ended March 31, |
(in thousands) | | | 2021 | 2020 |
Increases in gross profit for changes in estimates for over time contracts | | | $ | 3,025 | | $ | 8,182 | |
Decreases in gross profit for changes in estimates for over time contracts | | | (1,358) | | (4,845) | |
Net changes in gross profit for changes in estimates for over time contracts | | | $ | 1,667 | | $ | 3,337 | |
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 |
Increases in estimates for percentage-of-completion contracts | $ | 3,040 |
| $ | 7,996 |
| | $ | 15,777 |
| $ | 33,056 |
|
Decreases in estimates for percentage-of-completion contracts | (12,312 | ) | (22,126 | ) | | (135,445 | ) | (65,805 | ) |
Net changes in estimates for percentage-of-completion contracts | $ | (9,272 | ) | $ | (14,130 | ) | | $ | (119,668 | ) | $ | (32,749 | ) |
B&W Renewable EPC Loss Contracts
As disclosed in our December 31, 2016 consolidated financial statements, weWe had four6 B&W Renewable EPC contracts for renewable energy projectsfacilities in Europe that were loss contracts at December 31, 2016. During2017. 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 Babcock & Wilcox Renewable segment which turned into a loss contract in the fourth quarter of 2019.
In the three months ended June 30, 2017, two additional renewable energy projects in Europe became loss contracts. During the threeMarch 31, 2021 and nine months ended September 30, 2017,March 31, 2020, we recorded a total of $11.6$0.1 million and $123.8$0.1 million respectively, in net lossesgains, respectively, inclusive of warranty expense as described in Note 10, resulting from changes in the estimated revenues and costs to complete these sixthe 6 European renewable energyB&W Renewable EPC loss contracts. These changes in estimates include an increase in our estimate ofAll 6 contracts were approximately 100% complete at March 31, 2021; total liquidated damages associated with these six projects of $13.26 contracts were $92.5 million and $22.6 million in the three and nine months ended September 30, 2017, respectively, to a total of $62.8$86.5 million at September 30, 2017.March 31, 2021 and March 31, 2020, respectively. The charges recordedchange in the nine months
ended September 30, 2017 wereliquidated damages was due to revisions in the estimated revenues and costs at completion during the period, primarily as a resultforeign exchange impact.
In 2019, one of structural steel design issues including the anticipated schedule impact, scheduling delays and shortcomings in our subcontractors' estimated productivity. Also included in the charges recorded in the nine months ended September 30, 2017 were corrections that reduced (increased) estimated contract losses at completion by $1.0 million, $(6.0) million and $1.1 million relating to the three months ended December 31, 2016, March 31, 2017 and June 30, 2017, respectively. Management has determined these amounts are immaterial to the consolidated financial statements in these previous periods. As of September 30, 2017, the status of these six lossother B&W Renewable energy contracts was as follows:
The first project becameturned into a loss contract in the second quarter of 2016. As of September 30, 2017, this project is approximately 97% completedue to delays and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017, andother start-up costs prior to turnover activities linked to the customer's operation of the facility are expected to be completed during the first quarter of 2018. During the three and nine months ended September 30, 2017, we recognized additional contract losses of $4.6 million and $15.1 million, respectively, on the project as a result of differencesclient in actual and estimated costs and schedule delays. Our estimate at completion as of September 30, 2017 includes $9.4 million of total expected liquidated damages. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $2.3 million.October 2019. In the three and nine months ended September 30, 2016, we recognized charges of $14.0 million and $45.7 million, respectively, and as of September 30, 2016, this project had $7.8 million of accrued losses and was 79% complete.
The second project became a loss contract in the fourth quarter of 2016. As of September 30, 2017, this contract was approximately 75% complete, and we expect this project to be completed in early 2018. During the three and nine months ended September 30, 2017, we recognized contract gains of $2.0 million and contract losses of $35.4 million, respectively, on this project as a result of changes in construction cost estimates and schedule delays. Our estimate at completion as of September 30, 2017 includes $15.5 million of total expected liquidated damages. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $13.6 million.
The third project became a loss contract in the fourth quarter of 2016. As of September 30, 2017, this contract was approximately 95% complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017, and turnover activities linked to the customer's operation of the facility are expected to be completed during the fourth quarter of 2017. During the three and nine months ended September 30, 2017, we recognized additional contract losses of $1.6 million and $7.1 million, respectively, as a result of changes in the estimated costs at completion. Our estimate at completion as of September 30, 2017 includes $6.7 million of total expected liquidated damages for schedule delays. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $1.7 million.
The fourth project became a loss contract in the fourth quarter of 2016. As of September 30, 2017, this contract was approximately 77% complete, and we expect this project to be completed in early 2018. During the three and nine months ended September 30, 2017, we revised our estimated revenue and costs at completion for this loss contract, which resulted in contract gains of $4.5 million and contract losses of $17.4 million, respectively. Our estimate at completion as of September 30, 2017 includes $8.9 million of total expected liquidated damages due to schedule delays. The changes in the status of this project were primarily attributable to changes in the estimated costs at completion, offset by a $4.8 million reduction in estimated liquidated damages we recognized during the three months ended March 31, 2017.2021 and March 31, 2020, we did 0t recognize additional charges on this contract. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $5.2 million.
The fifth project became a loss contract in the second quarter of 2017. As of September 30, 2017,March 31, 2021, this contract was approximately 60% complete, and we expect this project to be completed in the second half of 2018. During the three and nine months ended September 30, 2017, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of $12.0 million and $35.3 million, respectively. Our estimate at completion as of September 30, 2017 includes $17.9 million of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $14.3 million.99% complete.
The sixth project became a loss contract in the second quarter of 2017. As of September 30, 2017, this contract was approximately 68% complete, and we expect this project to be completed in the first half of 2018. During the nine months ended September 30, 2017, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of $18.5 million. We had no significant change in estimate on this loss contract during the
three months ended September 30, 2017. Our estimate at completion as of September 30, 2017 includes $4.3 million of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of September 30, 2017, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was $3.3 million.
In September 2017, we identified the failure of a structural steel beam on the fifth project, which temporarily stopped worka contact for a biomass plant in the boiler building pending corrective actions to stabilize the structure that are expected to be complete in the fourth quarter of 2017.United Kingdom, 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 projects,two other contracts, and although no structural failure occurred on these two other projects,contracts, work was also stopped for a short period of time, andin certain restricted areas while we added reinforcement ofto the structure is underway.structures, which also resulted in delays. The total costs related to thesethe structural steel issues areon these three contracts were estimated to be approximately $20$36 million, which include the impact of project delays, and is included in the September 30, 2017March 31, 2021 estimated losses at completion for these three projects ascontracts. We are continuing to aggressively pursue recovery of this cost from responsible subcontractors. In October 2020, we entered into a settlement agreement with an insurer under which we received a settlement of $26.0 million to settle claims in connection with 5 of 6 European B&W Renewable EPC loss contracts disclosed above.
The Company is continuing to pursue other additional potential claims where appropriate and available.
B&W Environmental Loss Contracts
At March 31, 2021, the B&W Environmental segment had 2 significant loss contracts, each of which are contracts for a dry cooling system for a gas-fired power plant in the preceding paragraphs.United States. In the three months ended March 31, 2021 and March 31, 2020, we did 0t recognize additional charges on these contracts. As of March 31, 2021, the first contract was approximately 100% complete and the second contract was approximately 99% complete.
Also
NOTE 5 – INVENTORIES
The components of inventories are as follows:
| | | | | | | | |
(in thousands) | March 31, 2021 | December 31, 2020 |
Raw materials and supplies | $ | 46,851 | | $ | 46,659 | |
Work in progress | 8,460 | | 8,195 | |
Finished goods | 12,553 | | 12,307 | |
Total inventories | $ | 67,864 | | $ | 67,161 | |
NOTE 6 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASE
Property, plant and equipment less accumulated depreciation is as follows:
| | | | | | | | |
(in thousands) | March 31, 2021 | December 31, 2020 |
Land | $ | 1,533 | | $ | 1,584 | |
Buildings | 33,902 | | 34,207 | |
Machinery and equipment | 150,605 | | 151,399 | |
Property under construction | 5,182 | | 5,336 | |
| 191,222 | | 192,526 | |
Less accumulated depreciation | 137,025 | | 135,925 | |
Net property, plant and equipment | 54,197 | | 56,601 | |
Finance lease | 34,254 | | 30,551 | |
Less finance lease accumulated amortization | 2,603 | | 2,074 | |
Net property, plant and equipment, and finance lease | $ | 85,848 | | $ | 85,078 | |
NOTE 7 - GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of March 31, 2021:
| | | | | | | | | | | | | | |
(in thousands) | B&W Renewable | B&W Environmental | B&W Thermal | Total |
Balance at December 31, 2020 | $ | 10,211 | | $ | 5,673 | | $ | 31,479 | | $ | 47,363 | |
Currency translation adjustments | (1) | | (1) | | (7) | | (9) | |
Balance at March 31, 2021 | $ | 10,210 | | $ | 5,672 | | $ | 31,472 | | $ | 47,354 | |
Goodwill is tested for impairment annually and when impairment indicators exist. NaN impairment indicators were identified during the three months ended March 31, 2021. Because the B&W Thermal, B&W Construction Co., LLC, B&W Renewable and B&W Environmental reporting units each had negative carrying values, reasonable changes in assumptions would not indicate impairment.
NOTE 8– INTANGIBLE ASSETS
Our intangible assets are as follows:
| | | | | | | | |
(in thousands) | March 31, 2021 | December 31, 2020 |
Definite-lived intangible assets | | |
Customer relationships | $ | 24,102 | | $ | 24,862 | |
Unpatented technology | 15,321 | | 15,713 | |
Patented technology | 3,114 | | 2,642 | |
Tradename | 12,769 | | 13,088 | |
All other | 9,418 | | 9,262 | |
Gross value of definite-lived intangible assets | 64,724 | | 65,567 | |
Customer relationships amortization | (19,762) | | (19,537) | |
Unpatented technology amortization | (7,149) | | (6,751) | |
Patented technology amortization | (2,616) | | (2,593) | |
Tradename amortization | (4,978) | | (4,831) | |
All other amortization | (9,315) | | (9,252) | |
Accumulated amortization | (43,820) | | (42,964) | |
Net definite-lived intangible assets | $ | 20,904 | | $ | 22,603 | |
Indefinite-lived intangible assets | | |
Trademarks and trade names | $ | 1,305 | | $ | 1,305 | |
Total intangible assets, net | $ | 22,209 | | $ | 23,908 | |
The following summarizes the changes in the carrying amount of intangible assets:
| | | | | | | | |
| Three months ended March 31, |
(in thousands) | 2021 | 2020 |
Balance at beginning of period | $ | 23,908 | | $ | 25,300 | |
Amortization expense | (856) | | (895) | |
Currency translation adjustments | (843) | | (73) | |
Balance at end of the period | $ | 22,209 | | $ | 24,332 | |
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, 2021 | $ | 2,470 | |
Year ending December 31, 2022 | 3,321 | |
Year ending December 31, 2023 | 3,319 | |
Year ending December 31, 2024 | 3,247 | |
Year ending December 31, 2025 | 2,549 | |
Year ending December 31, 2026 | 1,292 | |
Thereafter | 4,706 | |
NOTE 9– LEASES
Certain fixed assets for our Copley, Ohio location were sold on March 15, 2021, as described in Note 23. In conjunction with the sale, we executed a leaseback agreement also commencing March 16, 2021 and expiring on March 31, 2033. The lease is classified as a finance lease with total future minimum payments during the initial term of the lease of approximately $5.7 million as of March 31, 2021. An incremental borrowing rate of 7% was used to determine the ROU asset. We recorded a $3.7 million ROU asset in net property, plant and equipment, and finance lease and corresponding liabilities in otheraccrued liabilities and other non-current finance liabilities in the Condensed Consolidated Balance Sheets as of March 31, 2021.
The components of lease expense included on our Condensed Consolidated Statements of Operations were as follows:
| | | | | | | | | | | | | |
| | | Three months ended March 31, |
(in thousands) | Classification | | | 2021 | 2020 |
Operating lease expense: | | | | | |
Operating lease expense | Selling, general and administrative expenses | | | $ | 1,339 | | $ | 1,507 | |
Short-term lease expense | Selling, general and administrative expenses | | | 1,155 | | 188 | |
Variable lease expense (1) | Selling, general and administrative expenses | | | 208 | | 776 | |
Total operating lease expense | | | | $ | 2,702 | | $ | 2,471 | |
| | | | | |
Finance lease expense: | | | | | |
Amortization of right-of-use assets | Selling, general and administrative expenses | | | $ | 529 | | $ | 515 | |
Interest on lease liabilities | Interest expense | | | 616 | | 615 | |
Total finance lease expense | | | | $ | 1,145 | | $ | 1,130 | |
| | | | | |
Sublease income (2) | Other – net | | | $ | (22) | | $ | (22) | |
Net lease cost | | | | $ | 3,825 | | $ | 3,579 | |
(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.
Other information related to leases is as follows:
| | | | | | | | |
| Three months ended March 31, |
(in thousands) | 2021 | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | $ | 1,355 | | $ | 1,400 | |
Operating cash flows from finance leases | 616 | | 615 | |
Financing cash flows from finance leases | 203 | | (586) | |
| March 31, 2021 | December 31, 2020 |
Right-of-use assets obtained in exchange for lease liabilities: | | |
Operating leases | $ | 491 | | $ | 2,629 | |
Finance leases | $ | 3,702 | | $ | 146 | |
| | |
Weighted-average remaining lease term: | | |
Operating leases (in years) | 3.0 | 3.1 |
Finance leases (in years) | 13.5 | 13.9 |
Weighted-average discount rate: | | |
Operating leases | 9.28 | % | 9.26 | % |
Finance leases | 7.92 | % | 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, 2021 | December 31, 2020 |
Operating lease assets | Right-of-use assets | $ | 9,513 | | $ | 10,814 | |
Finance lease assets | Net property, plant and equipment, and finance lease | 31,651 | | 28,477 | |
Total non-current lease assets | | $ | 41,164 | | $ | 39,291 | |
| | | |
Liabilities: | | | |
Current | | | |
Operating lease liabilities | Operating lease liabilities | $ | 3,578 | | $ | 3,995 | |
Finance lease liabilities | Other accrued liabilities | 920 | | 886 | |
Non-current | | | |
Operating lease liabilities | Non-current operating lease liabilities | 6,137 | | 7,031 | |
Finance lease liabilities | Non-current finance lease liabilities | 33,155 | | 29,690 | |
Total lease liabilities | | $ | 43,790 | | $ | 41,602 | |
Future minimum lease payments required under non-cancellable leases as of March 31, 2021 were as follows: | | | | | | | | | | | |
(in thousands) | Operating Leases | Finance Leases | Total |
2021 (excluding the three months ended March 31, 2021) | $ | 3,467 | | $ | 2,629 | | $ | 6,096 | |
2022 | 3,439 | | 3,793 | | 7,232 | |
2023 | 2,407 | | 3,879 | | 6,286 | |
2024 | 1,326 | | 3,944 | | 5,270 | |
2025 | 313 | | 3,969 | | 4,282 | |
Thereafter | 19 | | 38,412 | | 38,431 | |
Total | $ | 10,971 | | $ | 56,626 | | $ | 67,597 | |
Less imputed interest | (1,256) | | (22,551) | | (23,807) | |
Lease liability | $ | 9,715 | | $ | 34,075 | | $ | 43,790 | |
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) | 2021 | 2020 |
Balance at beginning of period | $ | 25,399 | | $ | 33,376 | |
Additions | 1,475 | | 1,350 | |
Expirations and other changes | (1,318) | | (517) | |
Payments | (5,943) | | (3,119) | |
Translation and other | (76) | | (137) | |
Balance at end of period | $ | 19,537 | | $ | 30,953 | |
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
The Company incurred restructuring charges in the three months ended September 30, 2017, we adjusted the designMarch 31, 2021 and 2020. The charges primarily consist of three of these renewable facilitiesseverance costs related to increase the guaranteed power output, which will allow us to achieve contractual bonus opportunities for the higher output. The bonus opportunities increased the estimated selling priceactions taken, including as part of the three contracts by approximately $15 million in total,Company’s strategic, market-focused organizational and this positive change in estimated costre-branding initiative. During 2021, these charges also include actions taken to complete was fully recognized inaddress the third quarterimpact of 2017 because each of these three were loss projects.
During the three and nine months ended September 30, 2017, we recognized a net loss of $2.3 millionCOVID-19 on our business.
The following table summarizes the restructuring activity incurred by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | Three months ended March 31, |
| 2021 | | 2020 |
(in thousands) | Total | Severance and related costs | Other (1) | | Total | Severance and related costs | Other (1) |
B&W Renewable segment | $ | 509 | | $ | 453 | | $ | 56 | | | $ | 801 | | $ | 658 | | $ | 143 | |
B&W Environmental segment | 89 | | 35 | | 54 | | | 140 | | 57 | | 83 | |
B&W Thermal segment | 348 | | 12 | | 336 | | | 941 | | 386 | | 555 | |
Corporate | 47 | | 0 | | 47 | | | 69 | | 0 | | 69 | |
| $ | 993 | | $ | 500 | | $ | 493 | | | $ | 1,951 | | $ | 1,101 | | $ | 850 | |
| Total | Severance and related costs | Other (1) | | | | |
Cumulative costs to date | $ | 41,307 | | 33,713 | | 7,594 | | | | | |
(1) Other amounts consist primarily of exit, relocation, COVID-19 related and other renewable energy projects that are not loss contracts, and we expect them to remain profitable at completion.costs.
During the third quarter of 2016, we determined it was probable that we would receive a $15.0 million insurance recovery for a portion of the losses on the first European renewable energy project discussed above. There was no change in the accrued probable insurance recovery at September 30, 2017. The insurance recovery represents the full amount available under the insurance policy, and is recorded in accounts receivable - other in our condensed consolidated balance sheet at September 30, 2017.
NOTE 6 – RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
Restructuring liabilities
Restructuring liabilities are included in other accrued liabilities on our condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
| | | | | | | | | | |
| | Three months ended March 31, |
(in thousands) | | | 2021 | 2020 |
Balance at beginning of period | | | $ | 8,146 | | $ | 5,358 | |
Restructuring expense | | | 993 | | 1,951 | |
Payments | | | (1,117) | | (1,968) | |
Balance at end of period | | | $ | 8,022 | | $ | 5,341 | |
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 |
Balance at beginning of period (1) | $ | 967 |
| $ | 11,984 |
| | $ | 2,254 |
| $ | 740 |
|
Restructuring expense | 3,428 |
| 1,792 |
| | 7,285 |
| 19,816 |
|
Payments | (2,399 | ) | (10,422 | ) | | (7,543 | ) | (17,202 | ) |
Balance at September 30 | $ | 1,996 |
| $ | 3,354 |
| | $ | 1,996 |
| $ | 3,354 |
|
(1) ForThe payments shown above for the three month periodsmonths ended September 30, 2017March 31, 2021 and 2016, the balance at the beginning of the period is as of June 30, 2017 and 2016, respectively. For the nine month periods ended September 30, 2017 and 2016, the balance at the beginning of the period is as of December 31, 2016 and 2015, respectively.
2020 relate primarily to severance. Accrued restructuring liabilities at September 30, 2017March 31, 2021 and 20162020 relate primarily to employee termination benefits.
Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the three and nine months ended September 30, 2017, we recognized $0.2 million and $0.6 million, respectively, in non-cash restructuring expense related to losses (gains) on the disposals of long-lived assets. In the three and nine months ended September 30, 2016, we recognized non-cash charges of $0.2 million and $14.8 million, respectively, related to impairments of long-lived assets.
Spin-off transaction costs
Spin-off costs were primarily attributable to employee retention awards directly related to the spin-off from our former parent, The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). In the three and nine months ended September 30, 2017, we recognized spin-off costs of $0.2 million and $1.0 million, respectively. In the three and nine months ended September 30, 2016, we recognized spin-off costs of $0.4 million and $3.4 million, respectively. In the nine months ended September 30, 2017, we disbursed $1.9 million of the accrued retention awards.
NOTE 7 – PROVISION FOR INCOME TAXES
We had an income tax benefit of $5.6 million in the three months ended September 30, 2017, which resulted in a 4.7% effective tax rate as compared to $1.6 million of income tax expense in the three months ended September 30, 2016, which resulted in a 15.2% effective tax rate. Our effective tax rate for the three months ended September 30, 2017 was lower than our statutory rate primarily due to nondeductible goodwill impairment charges, foreign losses in our Renewable segment that are subject to a valuation allowance and nondeductible expenses, offset by favorable discrete items of $0.4 million. The discrete items include favorable adjustments to prior year U.S. tax returns and the effect of vested and exercised share-based compensation awards. Our effective tax rate for the three months ended September 30, 2016 was lower than our statutory rate primarily due to changes in the jurisdictional mix of our forecasted full year income and losses and favorable impacts from adjustments related to prior years' tax returns in the United States and foreign jurisdictions.
We had an income tax benefit of $7.6 million in the nine months ended September 30, 2017, which resulted in a 2.7% effective tax rate as compared to an income tax benefit of $0.8 million in the nine months ended September 30, 2016, which resulted in a 1.8% effective tax rate for the nine months ended September 30, 2016. Our effective tax rate for the nine months ended September 30, 2017 was lower than our statutory rate primarily due to the reasons noted above, as well as the second quarter tax benefit associated with the impairment of our equity method investment in India, which was offset by a valuation allowance, second quarter discrete items including withholding tax on a forecasted distribution outside the United States, partly offset by first quarter favorable discrete adjustments to prior year foreign tax returns and nondeductible transaction costs. Our effective tax rate for the nine months ended September 30, 2016 was lower than our statutory rate primarily due to a $13.1 million increase in valuation allowances associated with deferred tax assets related to our equity investment in a foreign joint venture and state net operating losses, and to the jurisdictional mix of our forecasted full year income and losses, as described above.
During the nine months ended September 30, 2017, we prospectively adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting. Adopting the new accounting standard resulted in a net $0.2 million and $1.7 million income tax benefit in the three and nine months ended September 30, 2017, respectively, associated with the income tax effects of vested and exercised share-based compensation awards.
NOTE 812 – COMPREHENSIVE INCOMEPENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Gains and losses deferredComponents of net periodic benefit cost (benefit) included in accumulated other comprehensivenet income (loss) ("AOCI") are reclassified and recognized in the condensed consolidated statements of operations once they are realized. The changes in the components of AOCI, net of tax, for the first three quarters in 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
(in thousands) | Currency translation gain (loss) (net of tax) | Net unrealized gain (loss) on investments (net of tax) | Net unrealized gain (loss) on derivative instruments (net of tax) | Net unrecognized gain (loss) related to benefit plans (net of tax) | Total |
Balance at December 31, 2016 | $ | (43,987 | ) | $ | (37 | ) | $ | 802 |
| $ | 6,740 |
| $ | (36,482 | ) |
Other comprehensive income (loss) before reclassifications | 5,417 |
| 61 |
| 4,587 |
| (44 | ) | 10,021 |
|
Amounts reclassified from AOCI to net income (loss) | — |
| (27 | ) | (3,843 | ) | (882 | ) | (4,752 | ) |
Net current-period other comprehensive income (loss) | 5,417 |
| 34 |
| 744 |
| (926 | ) | 5,269 |
|
Balance at March 31, 2017 | $ | (38,570 | ) | $ | (3 | ) | $ | 1,546 |
| $ | 5,814 |
| $ | (31,213 | ) |
Other comprehensive income (loss) before reclassifications | 6,757 |
| (19 | ) | (2,204 | ) | (97 | ) | 4,437 |
|
Amounts reclassified from AOCI to net income (loss) | — |
| (1 | ) | (658 | ) | (800 | ) | (1,459 | ) |
Net current-period other comprehensive income (loss) | 6,757 |
| (20 | ) | (2,862 | ) | (897 | ) | 2,978 |
|
Balance at June 30, 2017 | (31,813 | ) | (23 | ) | (1,316 | ) | 4,917 |
| (28,235 | ) |
Other comprehensive income (loss) before reclassifications | 2,591 |
| 69 |
| 268 |
| (66 | ) | 2,862 |
|
Amounts reclassified from AOCI to net income (loss) | — |
| (4 | ) | 3,567 |
| (630 | ) | 2,933 |
|
Net current-period other comprehensive income (loss) | 2,591 |
| 65 |
| 3,835 |
| (696 | ) | 5,795 |
|
Balance at September 30, 2017 | $ | (29,222 | ) | $ | 42 |
| $ | 2,519 |
| $ | 4,221 |
| $ | (22,440 | ) |
|
| | | | | | | | | | | | | | | |
(in thousands) | Currency translation gain (loss) (net of tax) | Net unrealized gain (loss) on investments (net of tax) | Net unrealized gain (loss) on derivative instruments (net of tax) | Net unrecognized gain (loss) related to benefit plans (net of tax) | Total |
Balance at December 31, 2015 | $ | (19,493 | ) | $ | (44 | ) | $ | 1,786 |
| $ | (1,102 | ) | $ | (18,853 | ) |
Other comprehensive income (loss) before reclassifications | 1,740 |
| 18 |
| 2,576 |
| (61 | ) | 4,273 |
|
Amounts reclassified from AOCI to net income (loss) | — |
| 1 |
| (1,003 | ) | 61 |
| (941 | ) |
Net current-period other comprehensive income | 1,740 |
| 19 |
| 1,573 |
| — |
| 3,332 |
|
Balance at March 31, 2016 | $ | (17,753 | ) | $ | (25 | ) | $ | 3,359 |
| $ | (1,102 | ) | $ | (15,521 | ) |
Other comprehensive income (loss) before reclassifications | (11,566 | ) | (7 | ) | 778 |
| 37 |
| (10,758 | ) |
Amounts reclassified from AOCI to net income (loss) | — |
| — |
| (651 | ) | 58 |
| (593 | ) |
Net current-period other comprehensive income (loss) | (11,566 | ) | (7 | ) | 127 |
| 95 |
| (11,351 | ) |
Balance at June 30, 2016 | (29,319 | ) | (32 | ) | 3,486 |
| (1,007 | ) | (26,872 | ) |
Other comprehensive income (loss) before reclassifications | 2,811 |
| 18 |
| 1,132 |
| (25 | ) | 3,936 |
|
Amounts reclassified from AOCI to net income (loss) | — |
| — |
| (1,247 | ) | 8 |
| (1,239 | ) |
Net current-period other comprehensive income (loss) | 2,811 |
| 18 |
| (115 | ) | (17 | ) | 2,697 |
|
Balance at September 30, 2016 | $ | (26,508 | ) | $ | (14 | ) | $ | 3,371 |
| $ | (1,024 | ) | $ | (24,175 | ) |
The amounts reclassified out of AOCI by component and the affected condensed consolidated statements of operations line items are as follows (in thousands):
|
| | | | | | | | | | | | | | |
AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | Three months ended September 30, | | Nine months ended September 30, |
2017 | 2016 | | 2017 | 2016 |
Derivative financial instruments | Revenues | $ | 2,092 |
| $ | 1,940 |
| | $ | 8,094 |
| $ | 4,524 |
|
| Cost of operations | 159 |
| 24 |
| | 113 |
| 57 |
|
| Other-net | (7,930 | ) | (445 | ) | | (7,438 | ) | (1,065 | ) |
| Total before tax | (5,679 | ) | 1,519 |
| | 769 |
| 3,516 |
|
| Provision for income taxes | (2,112 | ) | 272 |
| | (165 | ) | 615 |
|
| Net income | $ | (3,567 | ) | $ | 1,247 |
| | $ | 934 |
| $ | 2,901 |
|
| | | | | | |
Amortization of prior service cost on benefit obligations | Cost of operations | $ | 619 |
| $ | (15 | ) | | $ | 2,281 |
| $ | 294 |
|
| Provision for income taxes | (11 | ) | (7 | ) | | (31 | ) | 421 |
|
| Net income (loss) | $ | 630 |
| $ | (8 | ) | | $ | 2,312 |
| $ | (127 | ) |
| | | | | | |
Realized gain on investments | Other-net | $ | 6 |
| $ | — |
| | $ | 50 |
| $ | (1 | ) |
| Provision for income taxes | 2 |
| — |
| | 18 |
| — |
|
| Net income (loss) | $ | 4 |
| $ | — |
| | $ | 32 |
| $ | (1 | ) |
NOTE 9 – CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | | Other Benefits |
| | Three months ended March 31, | | | Three months ended March 31, |
(in thousands) | | | 2021 | 2020 | | | | 2021 | 2020 |
Interest cost | | | $ | 5,671 | | $ | 8,261 | | | | | $ | 39 | | $ | 72 | |
Expected return on plan assets | | | (15,009) | | (15,641) | | | | | 0 | | 0 | |
Amortization of prior service cost (credit) | | | 28 | | 43 | | | | | 173 | | (271) | |
Benefit plans, net (1) | | | (9,310) | | (7,337) | | | | | 212 | | (199) | |
Service cost included in COS (2) | | | 217 | | 211 | | | | | 6 | | 5 | |
Net periodic benefit cost (benefit) | | | $ | (9,093) | | $ | (7,126) | | | | | $ | 218 | | $ | (194) | |
|
| | | | | | |
(in thousands) | September 30, 2017 | December 31, 2016 |
Held by foreign entities | $ | 44,778 |
| $ | 94,415 |
|
Held by United States entities | 3,359 |
| 1,472 |
|
Cash and cash equivalents | $ | 48,137 |
| $ | 95,887 |
|
| | |
Reinsurance reserve requirements | $ | 21,456 |
| $ | 21,189 |
|
Restricted foreign accounts | 5,192 |
| 6,581 |
|
Restricted cash and cash equivalents | $ | 26,648 |
| $ | 27,770 |
|
Our United States revolving credit facility described in Note 17 allows for nearly immediate borrowing of available capacity to fund cash requirements(1) Benefit plans, net, which is presented separately in the normal courseCondensed Consolidated Statements of business, meaning thatOperations, is not allocated to the minimum United States cash on handsegments.
(2) Service cost related to a small group of active participants is maintained to minimize borrowing costs.
NOTE 10 – INVENTORIES
The componentspresented within cost of inventories are as follows:
|
| | | | | | |
(in thousands) | September 30, 2017 | December 31, 2016 |
Raw materials and supplies | $ | 66,995 |
| $ | 61,630 |
|
Work in progress | 9,518 |
| 6,803 |
|
Finished goods | 14,586 |
| 17,374 |
|
Total inventories | $ | 91,099 |
| $ | 85,807 |
|
NOTE 11 – EQUITY METHOD INVESTMENTS
Joint ventures in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. We assess our investments in unconsolidated affiliates for other-than-temporary-impairment when significant changes occuroperations in the investee's business or our investment philosophy. Such changes might include a seriesCondensed Consolidated Statement of operating losses incurred by the investee that are deemed other than temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated affiliate at fair value.
Our primary equity method investees include joint ventures in ChinaOperations and India, each of which manufactures boiler parts and equipment. At September 30, 2017 and December 31, 2016, our total investment in these joint ventures was $87.4 million and $98.7 million, respectively.
During the third quarter of 2017, both we and our joint venture partner began the process of scaling back the operations at Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), our joint venture in India, dueis allocated to the decline in forecasted market opportunities in India. Currently, the manufacturing facility in India has been reduced to essential personnel only while engineering services are expected to continue inB&W Thermal segment.
There were 0 MTM adjustments for our engineering office through the end of 2017. These actions are in line with our change in strategy for the joint venture announced in the second quarter of 2017, which reduced the expected recoverable value of our investment in TBWES. We recognized an $18.2 million other-than-temporary-impairment of our investment in TBWES during the nine months ended September 30, 2017. The impairment charge was based on the difference in the carrying value of our investment in TBWESpension and our share of the estimated fair value of TBWES's net assets.
NOTE 12– INTANGIBLE ASSETS
Our intangible assets are as follows: |
| | | | | | |
(in thousands) | September 30, 2017 | December 31, 2016 |
Definite-lived intangible assets | | |
Customer relationships | $ | 59,683 |
| $ | 47,892 |
|
Unpatented technology | 19,941 |
| 18,461 |
|
Patented technology | 6,560 |
| 2,499 |
|
Tradename | 22,818 |
| 18,774 |
|
Backlog | 30,088 |
| 28,170 |
|
All other | 7,550 |
| 7,429 |
|
Gross value of definite-lived intangible assets | 146,640 |
| 123,225 |
|
Customer relationships amortization | (21,931 | ) | (17,519 | ) |
Unpatented technology amortization | (4,443 | ) | (2,864 | ) |
Patented technology amortization | (2,043 | ) | (1,532 | ) |
Tradename amortization | (4,749 | ) | (3,826 | ) |
Acquired backlog amortization | (27,814 | ) | (21,776 | ) |
All other amortization | (6,965 | ) | (5,974 | ) |
Accumulated amortization | (67,945 | ) | (53,491 | ) |
Net definite-lived intangible assets | $ | 78,695 |
| $ | 69,734 |
|
| | |
Indefinite-lived intangible assets: | | |
Trademarks and trade names | $ | 1,305 |
| $ | 1,305 |
|
Total indefinite-lived intangible assets | $ | 1,305 |
| $ | 1,305 |
|
The following summarizes the changes in the carrying amount of intangible assets: |
| | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | 2016 |
Balance at beginning of period | $ | 71,039 |
| $ | 37,844 |
|
Business acquisitions | 19,500 |
| 55,438 |
|
Amortization expense | (14,455 | ) | (11,904 | ) |
Currency translation adjustments and other | 3,916 |
| 647 |
|
Balance at end of the period | $ | 80,000 |
| $ | 82,025 |
|
The January 11, 2017 acquisition of Universal resulted in an increase in our intangible asset amortization expense during the three and nine months ended September 30, 2017 of $0.5 million and $2.6 million, respectively.
The July 1, 2016 acquisition of SPIG, S.p.A. resulted in an increase in our intangible asset amortization expense during the three and nine months ended September 30, 2017 of $1.9 million and $7.3 million, respectively, and $7.1 million of intangible asset amortization expenseother postretirement benefit plans during the three months ended September 30, 2016.March 31, 2021 and 2020.
AmortizationWe made contributions to our pension and other postretirement benefit plans totaling $24.0 million and $0.4 million during the three months ended March 31, 2021 and 2020, respectively. Contributions made during the three months ended March 31, 2021 include $0.4 million of intangible assets is included in costinterest as required per the CARES Act that was signed into law on March 27, 2020.
In accordance with the American Rescue Plan Act of operations in our condensed consolidated statement2021, we elected to defer $20.9 million of operations, but it is not allocated to segment results.the estimated Pension Plan contribution payments of $45.6 million that would have been due during 2021.
Estimated future intangible asset amortization expense, including the increase in amortization expense resulting from the January 11, 2017 acquisition of Universal, is as follows (in thousands):
|
| | | |
Period ending | Amortization expense |
Three months ending December 31, 2017 | $ | 3,582 |
|
Twelve months ending December 31, 2018 | $ | 12,444 |
|
Twelve months ending December 31, 2019 | $ | 10,342 |
|
Twelve months ending December 31, 2020 | $ | 9,042 |
|
Twelve months ending December 31, 2021 | $ | 8,782 |
|
Twelve months ending December 31, 2022 | $ | 7,205 |
|
Thereafter | $ | 27,298 |
|
NOTE 13 – GOODWILL2021 SENIOR NOTES OFFERING
On February 12, 2021, we completed a public offering of $125.0 million aggregate principal amount of our 8.125% senior notes due 2026. The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated February 10, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the completion, we received gross proceeds of approximately $125.0 million. Net proceeds received were approximately $120.0 million after deducting underwriting discounts and commissions, but before expenses. The Senior Notes were issued in denominations of $25.00 per Senior Note and in integral multiples thereof.
In addition to the public offering, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Last Out Term Loan Tranche A-3 in a concurrent private offering.
The following summarizes the changes in the carrying amount of goodwill:
|
| | | | | | | | | | | | |
(in thousands) | Power | Renewable | Industrial | Total |
Balance at December 31, 2016 | $ | 46,220 |
| $ | 48,435 |
| $ | 172,740 |
| $ | 267,395 |
|
Increase resulting from Universal acquisition | — |
| — |
| 14,413 |
| 14,413 |
|
Third quarter 2017 impairment charges* | — |
| (49,965 | ) | (36,938 | ) | (86,903 | ) |
Currency translation adjustments | 1,180 |
| 1,530 |
| 6,490 |
| 9,200 |
|
Balance at September 30, 2017 | $ | 47,400 |
| $ | — |
| $ | 156,705 |
| $ | 204,105 |
|
* Prior to September 30, 2017, we had not recorded any goodwill impairment charges.
Our annual goodwill impairment assessment is performed on October 1 of each year (the "annual assessment" date); however, events during 2017 have required two interim assessments of all six of our reporting units. In the second quarter of 2017, significant charges in our Renewable segment was considered to be a triggering event for the interim assessment as of June 30, 2017, which did not indicate impairment. In the third quarter of 2017, our market capitalization significantly decreased to below our equity value, which was considered to be a trigger for a second interim assessment. Additionally, the forecast was reduced for our SPIG reporting unit based on a change in the market strategy implemented by the new segment management to focus on core geographies and products.
Assessing goodwill for impairment involves a two step test. Step 1components of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment loss, if any. Step 2 of the test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill, and impairment is measured as the excess of the carrying value over the implied value of goodwill. Estimating the fair value of a reporting unit requires significant judgment. The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a 50% weighting of an income approach using a discounted cash flow analysis based on forward-looking projections of future operating results, a 30% to 40% weighting of a market approach using multiples of revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") of guideline companies and a 20% to 10% weighting of a market approach using multiples of revenue and EBITDA from recent, similar business combinations.
We primarily attributed the significant decline in our market capitalization in the third quarter of 2017 to the announcement of significant charges in the Renewable reporting unit. Accordingly, we increased the discount rate applied to future projected cash flows from 15.0% at June 30, 2017 to 23.5% at September 30, 2017. As a result of the increase in the discount rate and an increase in the carrying value of the reporting unit, impairment was indicated at September 30, 2017, which measured $50.0 million ($48.9 million net of tax), the full carrying value. Other long-lived assets in the reporting unit were not impaired.
For our SPIG reporting unit, which is included in our Industrial segment, the Step 1 also indicated impairment. At June 30, 2017 and October 1, 2016, the fair value exceeded the carrying value by less than 1% and 5%, respectively. At September 30, 2017, the independently obtained fair value estimates decreased under both the income and market valuation approaches due
to a short-term decrease in profitability attributable to specific current contracts and changes in SPIG's market strategy introduced by segment management during the third quarter. The discount rate applied to future projected cash flows was 14.0% and 12.5% at each of the September 30, 2017 and June 30, 2017 interim tests, respectively. Step 2 of the impairment test at September 30, 2017 measured $36.9 million of impairment (with no income tax impact). The SPIG reporting unit has $38.0 million of goodwill remaining after the impairment charge. Other long-lived assets in the reporting unit were not impaired.
For the remaining four reporting units where impairment was not indicated at September 30, 2017, the goodwill balances at September 30, 2017 and the Step 1 goodwill impairment test headroom (the estimated fair value less the carrying value)Senior Notes are as follows:
| | | | | |
(in thousands) | March 31, 2021 |
8.125% Senior Notes due 2026 | $ | 160,000 | |
Unamortized deferred financing costs | 4,491 | |
Net debt balance | $ | 155,509 | |
|
| | | | | |
| Power Segment | | Industrial Segment |
(in millions) | Power | Construction | | MEGTEC | Universal |
Reporting unit headroom | 60% | 98% | | 12% | 18% |
Goodwill balance | $38.5 | $8.9 | | $104.3 | $14.4 |
Step 1The Senior Notes are senior unsecured obligations of the impairment test for our MEGTEC reporting unit, which is includedCompany and rank equally in our Industrial segment, did not indicate impairment,right of payment with all of the Company’s other existing and the fair value exceeded the carrying value by 12% at September 30, 2017 compared to 3.0% at June 30, 2017future senior unsecured and 22% at October 1, 2016. Under both the income and market valuation approaches, the fair value estimatesunsubordinated indebtedness. The Senior Notes bear interest at the interim assessment datarate of 8.125% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2021. The Senior Notes will mature on February 28, 2026.
We may, at our option, at any time and from time to time, redeem the second interim assessmentSenior Notes for cash in whole or in part (i) on or after February 28, 2022 and prior to February 28, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid
interest to, but excluding, the date decreased comparedof redemption, (ii) on or after February 28, 2023 and prior to February 29, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after February 29, 2024 and prior to February 28, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption and (iv) on or after February 28, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes. The Indenture governing the Senior Notes contains customary events of default and cure provisions.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional Senior Notes up to an aggregated principal amount of $150.0 million of Senior Notes. The Senior Notes will have the same terms as (other than date of issuance), form a single series of debt securities with and have the same CUSIP number and be fungible with, the Senior Notes issued February 12, 2021, as described above.
Senior Notes - Subsequent Event
As of May 10, 2021, the Company has sold $10.6 million aggregate principal amount of Senior Notes for $11.0 million gross proceeds related to the annual assessment date dueMarch 31, 2021 sales agreement disclosed above. The Company received $10.7 million of net cash proceeds after commission and fees.
Exchange Agreement
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to lower projected net sales and EBITDA. Similarwhich we issued to many industrial businesses, the reductionB. Riley, a related party, $35.0 million aggregate principal amount of Senior Notes in MEGTEC reporting unit revenues has been the resultexchange for a deemed prepayment of a decline in new equipment demand, primarily in the Americas; however, bookings trends have recently improved and backlog at September 30, 2017 is 67% higher than at the same date a year ago. The MEGTEC reporting unit recorded a 15% increase in revenues and a 16% increase in gross profit during the third quarter$35.0 million of 2017. The estimate of fair value of the MEGTEC reporting unit is sensitive to changes in assumptions, particularly assumed discount rates and projections of future operating results under the income approach. The discount rate applied to future projected cash flows was 12.5% and 11.0% at each of the September 30, 2017 and June 30, 2017 interim tests, respectively. Absent any other changes, an increase in the discount rate could result in future impairment of goodwill. Decreases in future projected operating results could also result in future impairment of goodwill.our existing Tranche A term loan with B. Riley Financial (the “Exchange”).
NOTE 14 – PROPERTY, PLANT & EQUIPMENT2021 COMMON STOCK OFFERING
Property, plant and equipment is stated at cost. The compositionOn February 12, 2021, we completed a public offering of our property, plantcommon stock pursuant to an underwriting agreement (the “Underwriting Agreement”) dated February 9, 2021, between us and equipment less accumulated depreciation is set forth below:
|
| | | | | | |
(in thousands) | September 30, 2017 | December 31, 2016 |
Land | $ | 8,802 |
| $ | 6,348 |
|
Buildings | 121,952 |
| 114,322 |
|
Machinery and equipment | 206,437 |
| 189,489 |
|
Property under construction | 14,218 |
| 22,378 |
|
| 351,409 |
| 332,537 |
|
Less accumulated depreciation | 208,302 |
| 198,900 |
|
Net property, plant and equipment | $ | 143,107 |
| $ | 133,637 |
|
NOTE 15 – WARRANTY EXPENSE
Changes in the carrying amountseveral underwriters (the “Underwriters”). At the closing, we issued to the public 29,487,180 shares of our accrued warranty expensecommon stock and received gross proceeds of approximately $172.5 million. Net proceeds from the offering were approximately $163.0 million after deducting underwriting discounts and commissions, but before expenses.
The net proceeds of the offering were used to make a prepayment towards the balance outstanding under our U.S. Revolving Credit Facility and permanently reduce the commitments under our senior secured credit facilities.
NOTE 15– LAST OUT TERM LOANS
The components of the Last Out Term Loans by Tranche are as follows:
| | | | | |
| March 31, 2021 |
(in thousands) | A-3 |
Proceeds (1) | $ | 61,660 | |
Discount and fees | 8,650 | |
Paid-in-kind interest | 3,020 | |
Net debt balance | $ | 73,330 | |
(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment from the July 2019 Equitization Transactions and a $40.0 million principal repayment in March 2021
|
| | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | 2016 |
Balance at beginning of period | $ | 40,467 |
| $ | 39,847 |
|
Additions | 17,818 |
| 18,300 |
|
Expirations and other changes | (9,053 | ) | (2,945 | ) |
Increases attributable to business combinations | 1,060 |
| 901 |
|
Payments | (11,126 | ) | (10,922 | ) |
Translation and other | 2,064 |
| (217 | ) |
Balance at end of period | $ | 41,230 |
| $ | 44,964 |
|
| | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | A-3 | A-4 | A-6 | Total |
Proceeds (1) | $ | 101,660 | | $ | 30,000 | | $ | 40,000 | | $ | 171,660 | |
Discount and fees | 8,650 | | 0 | | 0 | | 8,650 | |
Paid-in-kind interest | 3,020 | | 0 | | 0 | | 3,020 | |
Net debt balance | $ | 113,330 | | $ | 30,000 | | $ | 40,000 | | $ | 183,330 | |
(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment from the July 2019 Equitization Transactions.
During
Last Out Term Loans are incurred under our A&R Credit Agreement and are pari passu with the nineU.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 the effectiveness of the A&R Credit Agreement, the maturity date for the Last Out Term Loans was extended to December 30, 2022.
On February 12, 2021, in connection with the Exchange described in Note 13, the interest rate on the remaining Last Out Term Loan Tranche A balances was reduced to 6.625% from 12.0%. Interest expense associated with the Last Out Term Loans is detailed in Note 17.
Tranche A-3
Effective with Amendment No. 16 to our previous Amended Credit Agreement, we borrowed $150.0 million face value from B. Riley, a related party, under Tranche A-3. 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 B&W Renewable loss projects as described in Note 4, with the remainder used for working capital and general corporate purposes.
As part of the Equitization Transactions of July 23, 2019, we prepaid $39.7 million principal of Tranche A-3. Also, on March 4, 2021, effective with A&R Amendment No. 3, we paid down an additional $40.0 million on our existing Tranche A-3.
Tranche A-4
On January 31, 2020, effective with Amendment No. 20 to the Amended Credit Agreement, we borrowed $30.0 million face value of the Tranche A-4 from B. Riley, a related party and received net proceeds of $26.3 million after incurring total fees of $3.7 million. On March 4, 2021, effective with A&R Amendment No. 3, we paid down the $30.0 million outstanding on our existing Tranche A-4.
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 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 13, 2021, 0 borrowings occurred under Tranche A-5.
Tranche A-6
On May 14, 2020, effective with the A&R Credit Agreement, we borrowed $30.0 million face value of the Tranche A-6 from B. Riley, a related party, as described in Note 16. On November 30, 2020, we borrowed an additional $10.0 million face value of the Tranche A-6 pursuant to the terms of the A&R Credit Agreement which required the proceeds to be applied as a permanent reduction of the U.S. Revolving Credit Facility.
As described in Note 13, on February 12, 2021, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Tranche A-6 as part of the Exchange. Also, on March 4, 2021, effective with A&R Amendment No. 3, we paid down the remaining $5.0 million outstanding on our existing Tranche A-6.
Tranche A-7
The A&R Credit Agreement provided us with up to $50.0 million of additional funding for letters of credit in the form of Tranche A-7, from B. Riley, a related party, as described in Note 16. The $50.0 million will be available upon request by the Company, subject to certain limitations. As of May 13, 2021, 0 borrowings occurred under Tranche A-7.
NOTE 16 – REVOLVING DEBT
Our revolving debt was comprised of our U.S. Revolving Credit Facility in the U.S.in the amount of $164.3 million as of December 31, 2020. As described below, effective with A&R Amendment No. 3 on March 4, 2021, we can no longer obtain revolving loans under the terms of our A&R Credit Agreement.
A&R Credit Agreement
On May 11, 2015, we entered into an amended credit agreement with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc.) which governs the U.S. Revolving Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments to the credit agreement, including several to avoid default under the financial and other covenants specified in the credit agreement.
On May 14, 2020, we entered into the A&R Credit Agreement which refinances and extends the maturity of our U.S. Revolving Credit Facility and Last Out Term Loans.
On October 30, 2020, we entered into A&R Amendment No. 1 with Bank of America, N.A. A&R Amendment No. 1, among other matters, (i) provides that, under the A&R Credit Agreement, the "Commitment Reduction Amount" shall be an amount equal to (a) for any "Prepayment Event" relating to a "Recovery Event" (each as defined under the A&R Credit Agreement), 50% of the net cash proceeds with respect to such Prepayment Event, and (b) with respect to any other Prepayment Event under the A&R Credit Agreement, the net cash proceeds with respect to such Prepayment Event, and (ii) establishes new financial covenants for interest coverage ratios and senior leverage ratios.
On February 8, 2021, we entered into A&R Amendment No. 2 with Bank of America, N.A., as administrative agent to the lenders under our Amended and Restated Credit Agreement. A&R Amendment No. 2 amends our A&R Credit Agreement to, among other matters, (i) permit the issuance of 8.125% Senior Notes offering described above, (ii) permit the deemed prepayment of $35.0 million of our Last Out Term Loan Tranche A with $35.0 million principal amount of Senior Notes, (iii) provide that 75% of the Senior Notes gross proceeds shall be used to repay outstanding borrowings and permanently reduce the commitments under our senior secured credit facilities, and (iv) provide that $5.0 million of certain previously deferred facility fees will be paid by the Company.
On March 4, 2021, we entered into A&R Amendment No. 3 with Bank of America, N.A. A&R Amendment No. 3, among other matters, at the date of effectiveness (i) permits the prepayment of certain term loans, (ii) reduces the revolving credit
commitments to $130.0 million and removes the ability to obtain revolving loans under the credit agreement, and (iii) amends certain covenants and conditions to the extension of credit.
On March 26, 2021, we entered into A&R Amendment No. 4 with Bank of America, N.A. A&R Amendment No. 4, among other matters, at the date of effectiveness (i) permits the issuance of 8.125% senior notes due 2026 up to an aggregate principle amount of $150.0 million, and (ii) modifies the calculation of the senior leverage ratio.
As of March 31, 2021, the future effective minimum interest coverage ratios under our A&R Credit Agreement are as follows:
•0.80:1.00 for the quarter ending June 30, 2021
•1.00:1.00 for the quarter ending September 30, 2021
•1.10:1.00 for the quarter ending December 31, 2021
•1.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
As of March 31, 2021, the future effective maximum permitted senior leverage ratios under our A&R Credit Agreement are as follows:
•4.25:1.00 for the quarter ending June 30, 2021
•3.75:1.00 for the quarter ending September 30, 2021
•3.00:1.00 for the quarter ending December 31, 2021
•2.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
See Note 25 - Subsequent Events for an additional amendment to the A&R Credit Agreement as of May 10, 2021.
U.S. Revolving Credit Facility
As of March 31, 2021, effective with Amendment No. 3 to the A&R Credit Agreement described above, the U.S. Revolving Credit Facility provides for an aggregate letters of credit amount of up to $130.0 million.
At March 31, 2021, usage under the U.S. Revolving Credit Facility consisted of $22.0 million of financial letters of credit and $82.1 million of performance letters of credit. At March 31, 2021, we had approximately $25.9 million available to meet letter of credit requirements based on our overall facility size.
On February 12, 2021, we received gross proceeds of $125.0 million from the 2021 Senior Notes offering. As required by the Company’s U.S. Revolving Credit Facility, 75% of the gross proceeds or $93.8 million received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility as of February 12, 2021.
Also on February 16, 2021, we prepaid $167.1 million toward the remaining outstanding U.S. Revolving Credit Facility.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of March 31, 2021 and December 31, 2020 was $60.7 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 $18.0 million as of March 31, 2021. Of the letters of credit issued under the U.S. Revolving Credit Facility, $27.3 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, 2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $266.4 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $34.7 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 17 –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) | | | 2021 | 2020 |
Components associated with borrowings from: | | | | |
Senior Notes | | | $ | 1,733 | | $ | 0 | |
Last Out Term Loans - cash interest | | | 3,513 | | 4,048 | |
| | | | |
| | | | |
U.S. Revolving Credit Facility | | | $ | 1,416 | | $ | 4,039 | |
| | | 6,662 | | 8,087 | |
Components associated with amortization or accretion of: | | | | |
Senior Notes | | | 1,468 | | 0 | |
Last Out Term Loans - discount and financing fees | | | 0 | | 2,150 | |
U.S. Revolving Credit Facility - deferred financing fees and commitment fees | | | 4,400 | | 9,035 | |
U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16 | | | 0 | | 1,658 | |
| | | 5,868 | | 12,843 | |
| | | | |
Other interest expense | | | 1,693 | | 1,161 | |
| | | | |
Total interest expense | | | $ | 14,223 | | $ | 22,091 | |
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, 2021 | December 31, 2020 | March 31, 2020 |
Held by foreign entities | $ | 25,169 | | $ | 38,726 | | $ | 27,937 | |
Held by U.S. entities | 28,664 | | 18,612 | | 7,447 | |
Cash and cash equivalents of continuing operations | 53,833 | | 57,338 | | 35,384 | |
| | | |
Reinsurance reserve requirements | 2,053 | | 4,551 | | 5,779 | |
Restricted foreign accounts | 0 | | 2,869 | | 3,107 | |
Bank guarantee collateral | 2,560 | | 2,665 | | 2,115 | |
Restricted cash and cash equivalents | 4,613 | | 10,085 | | 11,001 | |
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 58,446 | | $ | 67,423 | | $ | 46,385 | |
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) | 2021 | 2020 |
Income tax payments, net | $ | 1,499 | | $ | 793 | |
| | |
Interest payments on our U.S. Revolving Credit Facility | $ | 5,979 | | $ | 4,150 | |
Interest payments on our Last Out Term Loans | 3,560 | | 4,038 | |
Total cash paid for interest | $ | 9,539 | | $ | 8,188 | |
NOTE 18 – PROVISION FOR INCOME TAXES
In the three months ended September 30, 2017March 31, 2021, income tax expense was $2.8 million, resulting in an effective tax rate of (22.5)%. In the three months ended March 31, 2020, income tax benefit was $0.8 million, resulting in an effective tax rate of 2.4%. For the three months ended March 31, 2020, the Company determined the use of the discrete method was more appropriate than the annual effective tax rate method due to the financial uncertainty of the COVID-19 pandemic. Therefore, the Company applied a permitted exception to the ASC 740-270 rules and 2016,recorded the actual income tax expense discretely for the three months ended March 31, 2020.
Our effective tax rate for the three months ended March 31, 2021 and 2020 is not reflective of the U.S. statutory rate primarily due to valuation allowances against our Powernet deferred tax assets and discrete items. We have unfavorable discrete items of`$2.5 million for the three months ended March 31, 2021, which primarily represents withholding taxes, and favorable discrete items of $0.5 million for the three months ended March 31, 2020.
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom, with effective tax rates ranging between approximately 19% and 30%. We provide for income taxes based on the tax laws and rates in the jurisdictions where we conduct operations. These jurisdictions may have regimes of taxation that vary in both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary from period to period due to these variations, changes in jurisdictional mix of our income, and valuation allowances.
NOTE 19 – 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. On March 16, 2020 we filed a motion to dismiss, and on December 14, 2020 the court issued its order dismissing the fraud and negligent misrepresentation claims and finding that, in the event that parties’ contract is found to be valid, Plaintiffs’ claims for damages will be subject to the contractual cap on liability (defined as the $11.7 million purchase price subject to certain adjustments). On January 11, 2021, we filed our Answer and a Counterclaim for breach of contract, seeking damages in excess of $2.9 million. We intend to continue to vigorously litigate 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.
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 B&W Renewable segment reduced its accrued warranty expense by $4.7 millionfrom 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 $2.2 million, respectively, to reflect the expiration of warranties, and updated its estimated warranty accrual rate to reflect its warranty claims experienceinvestigation. The SEC has taken testimony from past and current contractual warranty obligations, which reducedofficers, directors, and employees in addition to also seeking testimony from certain third-parties. It is reasonably possible that the accrued warranty expense by $4.1 millionSEC 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.
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 nine months ended September 30, 2017. AdditionsDelaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF ("Stockholder Litigation"). 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 case is currently in discovery. We believe that the outcome of the Stockholder Litigation will not have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Other
Due to the warranty accrual include specific provisionsnature 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 industrial steam projects totaling $7.1 millionour prior experience, we do not expect that any of these other litigation proceedings, disputes and $2.1 million during the nine months ended September 30, 2017 and 2016, respectively.claims will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.
NOTE 1620 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITSCOMPREHENSIVE INCOME
Components of net periodic benefit cost (benefit) includedGains and losses deferred in netaccumulated other comprehensive income (loss) ("AOCI") are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension benefits | | Other benefits |
| Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 | | 2017 | 2016 | | 2017 | 2016 |
Service cost | $ | 227 |
| $ | 548 |
| | $ | 756 |
| $ | 1,137 |
| | $ | 3 |
| $ | 6 |
| | $ | 11 |
| $ | 18 |
|
Interest cost | 10,369 |
| 10,086 |
| | 30,905 |
| 30,890 |
| | (106 | ) | 206 |
| | 255 |
| 629 |
|
Expected return on plan assets | (14,936 | ) | (15,925 | ) | | (44,646 | ) | (46,107 | ) | | — |
| — |
| | — |
| — |
|
Amortization of prior service cost | 29 |
| 81 |
| | 80 |
| 335 |
| | (561 | ) | — |
| | (2,277 | ) | — |
|
Recognized net actuarial loss | — |
| 645 |
| | 1,062 |
| 30,545 |
| | — |
| — |
| | — |
| — |
|
Net periodic benefit cost (benefit) | $ | (4,311 | ) | $ | (4,565 | ) | | $ | (11,843 | ) | $ | 16,800 |
| | $ | (664 | ) | $ | 212 |
| | $ | (2,011 | ) | $ | 647 |
|
Duringgenerally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first quarter of 2017, lump sum payments from our Canadian pension plan resulted in a plan settlement of $0.4 million, which also resulted in interim mark to market accounting for the pension plan. The mark to market adjustment in the first quarter of 2017 was $0.7 million. The effect of these charges2021 and mark to market adjustments are reflected in the $1.1 million "Recognized net actuarial loss" for the nine months ended September 30, 2017 in the table above. There2020 were no significant plan settlements or interim mark to market adjustments during the second or third quarters of 2017.as follows:
| | | | | | | | | | | |
(in thousands) | Currency translation loss | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2020 | $ | (47,575) | | $ | (4,815) | | $ | (52,390) | |
Other comprehensive loss before reclassifications | (70) | | 0 | | (70) | |
Reclassified from AOCI to net income (loss) | (4,512) | | 198 | | (4,314) | |
Net other comprehensive (loss) income | (4,582) | | 198 | | (4,384) | |
Balance at March 31, 2021 | $ | (52,157) | | $ | (4,617) | | $ | (56,774) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
During the second and third quarters of 2016, we recorded adjustments to our benefit plan liabilities resulting from certain curtailment and settlement events. In September 2016, lump sum payments from our Canadian pension plan resulted in a $0.1 million pension plan settlement charge. In May 2016, the closure of our West Point, Mississippi manufacturing facility resulted in a $1.8 million curtailment charge in our United States pension plan. In April 2016, lump sum payments from our Canadian pension plan resulted in a $1.1 million plan settlement charge. These events resulted in interim mark to market accounting for the respective benefit plans in 2016. Mark to market charges in the three months ended September 30, 2016 were $0.5 million in our Canadian pension plan. Mark to market charges for our United States and Canadian pension plans were $27.5 million in the nine months ended September 30, 2016. The pension mark to market charges were impacted by higher than expected returns on pension plan assets. The weighted-average discount rate used to remeasure the benefit plan liabilities at September 30, 2016 was 3.88%. The effect of these charges and mark to market adjustments are reflected in the 2016 "Recognized net actuarial loss" in the table above.
| | | | | | | | | | | |
(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 before reclassifications | 2,380 | | 0 | | 2,380 | |
Reclassified from AOCI to net income (loss) | 0 | | (246) | | (246) | |
Net other comprehensive income (loss) | 2,380 | | (246) | | 2,134 | |
Balance at March 31, 2020 | $ | 8,123 | | $ | (4,063) | | $ | 4,060 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
We have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in Note 3 as the mark to market adjustment in the reconciliation of reportable segment income (loss) to consolidated operating losses. The recognized net actuarial loss during the three and nine months ended September 30, 2017 and 2016 was recorded in our condensed consolidated statements of operations in the following line items:
|
| | | | | | | | | | | | | |
| Pension benefits |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 |
Cost of operations | $ | — |
| $ | 580 |
| | $ | 954 |
| $ | 30,079 |
|
Selling, general and administrative expenses | — |
| 64 |
| | 106 |
| 465 |
|
Other | — |
| — |
| | 2 |
| — |
|
Total | $ | — |
| $ | 644 |
| | $ | 1,062 |
| $ | 30,544 |
|
We made contributions to our pension and other postretirement benefit plans totaling $9.8 million and $16.2 million during the three and nine months ended September 30, 2017, respectively, as compared to $1.8 million and $4.4 million during the three and nine months ended September 30, 2016, respectively.
See Note 23 for the future expected effect of FASB ASU 2017-07 on the presentation of benefit and expense related to our pension and post retirement plans.
NOTE 17 – REVOLVING DEBT
The componentsamounts reclassified out of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
| | | | | | |
(in thousands) | September 30, 2017 | December 31, 2016 |
United States | $ | 58,900 |
| $ | 9,800 |
|
Foreign | 12,398 |
| 14,241 |
|
Total revolving debt | $ | 71,298 |
| $ | 24,041 |
|
United States revolving credit facility
On May 11, 2015, we entered into a credit agreement with a syndicate of lenders ("Credit Agreement") in connection with our spin-off from The Babcock & Wilcox Company. The Credit Agreement, which is scheduled to mature on June 30, 2020, provides for a senior secured revolving credit facility, initially in an aggregate amount of up to $600.0 million. The proceeds from loans under the Credit Agreement are available for working capital needs and other general corporate purposes,AOCI by component and the full amount is available to support the issuanceaffected Condensed Consolidated Statements of letters of credit.
On February 24, 2017 and August 9, 2017, we entered into amendments to the Credit Agreement (the “Amendments” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (1) permit us to incur the debt under the second lien term loan facility (discussed further in Note 18), (2) modify the definition of EBITDA in the Amended Credit Agreement to exclude: up to $98.1 million of charges for certain Renewable segment contracts for periods including the quarter ended December 31, 2016, up to $115.2 million of charges for certain Renewable segment contracts for periods including the quarter ended June 30, 2017, up to $4.0 million of aggregate restructuring expenses incurred during the period from July 1, 2017 through September 30, 2018 measured on a consecutive four-quarter basis, realized and unrealized foreign exchange losses resulting from the impact of foreign currency changes on the valuation of assets and liabilities, and fees and expenses incurred in connection with the August 9, 2017 amendment, (3) replace the maximum leverage ratio with a maximum senior debt leverage ratio, (4) decrease the minimum consolidated interest coverage ratio, (5) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to $250.0 million in the aggregate, (6) reduce commitments under the revolving credit facility from $600.0 million to $500.0 million, (7) require us to maintain liquidity (as defined in the Amended Credit Agreement) of at least $75.0 million as of the last business day of any calendar month, (8) require us to repay outstanding borrowings under the revolving credit facility (without any reduction in commitments) with certain excess cash, (9) increase the pricing for borrowings and commitment fees under the Amended Credit Agreement, (10) limit our ability to incur debt and liens during the covenant relief period, (11) limit our ability to make acquisitions and investments in third parties during the covenant relief period, (12) prohibit us from paying dividends and undertaking stock
repurchases during the covenant relief period (other than our share repurchase from an affiliate of AIP (discussed further in Note 18)), (13) prohibit us from exercising the accordion described below during the covenant relief period, (14) limit our financial and commercial letters of credit outstanding under the Amended Credit Agreement to $30.0 million during the covenant relief period, (15) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales, (16) beginning with the quarter ended September 30, 2017, limit to no more than $25.0 million any cumulative net income losses attributable to certain Vølund projects, and (17) increase reporting obligations and require us to hire a third-party consultant. The covenant relief period will end, at our election, when the conditions set forth in the Amended Credit AgreementOperations line items are satisfied, but in no event earlier than the date on which we provide the compliance certificate for our fiscal quarter ending December 31, 2018.
Other than during the covenant relief period, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (1) $200.0 million plus (2) an unlimited amount, so long as for any commitment increase under this subclause (2) our senior leverage ratio (assuming the full amount of any commitment increase under this subclause (2) is drawn) is equal to or less than 2.00:1.0 after giving pro forma effect thereto. During the covenant relief period, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments. Following the covenant relief period, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
After giving effect to Amendments, loans outstanding under the Amended Credit Agreement bear interest at our option at either (1) the LIBOR rate plus 5.0% per annum or (2) the base rate (the highest of the Federal Funds rate plus 0.5%, the one month LIBOR rate plus 1.0%, or the administrative agent's prime rate) plus 4.0% per annum. Interest expense associated with our United States revolving credit facility loans for the three and nine months ended September 30, 2017 was $3.3 million and $7.0 million, respectively. Included in interest expense was $1.3 million and $2.1 million of non-cash amortization of direct financing costs for the three and nine months ended September 30, 2017, respectively. A commitment fee of 1.0% per annum is charged on the unused portions of the revolving credit facility. A letter of credit fee of 2.50% per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.50% per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Additionally, an annual facility fee of $1.5 million is payable on the first business day of 2018 and 2019, and a pro rated amount is payable on the first business day of 2020.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted senior debt leverage ratio as defined in the Amended Credit Agreement is:
6.00:1.0 for the quarter ended September 30, 2017,
8.50:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
6.25:1.0 for the quarter ending June 30, 2018,
4.00:1.0 for the quarter ending September 30, 2018,
3.75:1.0 for the quarter ending December 31, 2018,
3.25:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
3.00:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
The minimum consolidated interest coverage ratio as defined in the Credit Agreement is:
1.50:1.0 for the quarter ended September 30, 2017,
1.00:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
1.25:1.0 for the quarter ending June 30, 2018,
1.50:1.0 for each of the quarters ending September 30, 2018 and December 31, 2018,
1.75:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
2.00:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
Beginning with September 30, 2017, consolidated capital expenditures in each fiscal year are limited to $27.5 million.
At September 30, 2017, usage under the Amended Credit Agreement consisted of $58.9 million in borrowings at an effective interest rate of 6.88%, $7.7 million of financial letters of credit and $87.2 million of performance letters of credit. At September 30, 2017, we had $94.7 million available for borrowings or to meet letter of credit requirements primarily based on trailing 12 month EBITDA, and our leverage (as defined in the Amended Credit Agreement) ratio was 3.00 and our interest coverage ratio was 2.59. In addition, through September 30, 2017, we have used $11.6 million of the $25.0 million of permitted net income losses attributable to our Vølund projects. At September 30, 2017, we were in compliance with all of the covenants set forth in the Amended Credit Agreement.
Foreign revolving credit facilities
Outside of the United States, we have revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. These three foreign revolving credit facilities allow us to borrow up to $14.8 million in aggregate and each have a one year term. At September 30, 2017, we had $12.4 million in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of 5.17%.
Other credit arrangements
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States revolving credit facility as of September 30, 2017 and December 31, 2016 was $279.1 million and $255.2 million, respectively.
We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is adequate to support our existing project requirements for the next 12 months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2017, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $472.3 million.
NOTE 18 – SECOND LIEN TERM LOAN FACILITY
On August 9, 2017, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of American Industrial Partners ("AIP"), governing a second lien term loan facility. The second lien term loan facility consists of a second lien term loan in the principal amount of $175.9 million, all of which was borrowed on August 9, 2017, and a delayed draw term loan facility in the principal amount of up to $20.0 million, which may be drawn in a single draw prior to June 30, 2020, subject to certain conditions. Through September 30, 2017, we have not utilized the delayed draw term loan facility.
Borrowings under the second lien term loan, other than the delayed draw term loan, have a coupon interest rate of 10% per annum, and borrowings under the delayed draw term loan have a coupon interest rate of 12% per annum, in each case payable quarterly. Undrawn amounts under the delayed draw term loan accrue a commitment fee at a rate of 0.50%, which was paid at closing. The second lien term loan and any borrowings we may make under the delayed draw term loan have a scheduled maturity of December 30, 2020.
In connection with our entry into the second lien term loan facility, we used $50.9 million of the proceeds to repurchase approximately 4.8 million shares of our common stock (approximately 10% of our shares outstanding) held by an affiliate of AIP, which was one of the conditions precedent for the second lien term loan facility. Based on observable and unobservable market data, we determined the fair value of the shares we repurchased from the related party on August 9, 2017 was $16.7 million. We utilized a discounted cash flow model and estimates of our weighted average cost of capital on the transaction
date to derive the estimated fair value of the share repurchase. The $34.2 million difference between the share repurchase price and the fair value of the repurchased shares was recorded as a discount on the second lien term facility borrowing. Non-cash amortization of the debt discount and direct financing costs will be accreted to the carrying value of the loan through interest expense over the term of the second lien term loan facility utilizing the effective interest method and an effective interest rate of 18.64%.
The carrying value of the second lien term loan facility at September 30, 2017 was 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, | |
| | 2021 | 2020 | |
Release of currency translation adjustment with the sale of business | Gain on sale of business | | | $ | 4,512 | | $ | 0 | | |
Amortization of prior service cost on benefit obligations | Benefit plans, net | | | (198) | | 246 | | |
| Net income | | | $ | 4,314 | | $ | 246 | | |
|
| | |
Face value | Unamortized debt discount and direct financing costs | Net carrying value |
$175,884 | $37,500 | $138,384 |
Interest expense associated with our second lien credit agreement is comprised of the following:
|
| | | | |
(in thousands) | Actual for the period August 9, 2017 through September 30, 2017 | | Forecasted for the period October 1, 2017 through December 31, 2017 | Forecasted for the period January 1, 2018 through December 31, 2018 |
Coupon interest (10%) | $2,554 | | $4,433 | $17,588 |
Amortization of financing costs and discount | $1,095 | | $2,119 | $9,678 |
Total interest expense | $3,649 | | $6,552 | $27,266 |
Borrowings under the Second Lien Credit Agreement are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by second-priority liens on certain assets owned by us and the guarantors. The Second Lien Credit Agreement requires interest payments on loans on a quarterly basis until maturity. Voluntary prepayments made during the first year after closing are subject to a make-whole premium, voluntary prepayments made during the second year after closing are subject to a 3.0% premium and voluntary prepayments made during the third year after closing are subject to a 2.0% premium. The Second Lien Credit Agreement requires us to make certain prepayments on any outstanding loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances, and subject to certain restrictions contained in an intercreditor agreement among the lenders under the Amended Credit Agreement and the Second Lien Credit Agreement.
The Second Lien Credit Agreement contains representations and warranties, affirmative and restrictive covenants, financial covenants and events of default substantially similar to those contained in the Amended Credit Agreement, subject to appropriate cushions. The Second Lien Credit Agreement is generally less restrictive than the Amended Credit Agreement.
NOTE 19 – CONTINGENCIES
ARPA litigation
On February 28, 2014, the Arkansas River Power Authority ("ARPA") filed suit against Babcock & Wilcox Power Generation Group, Inc. (now known as The Babcock & Wilcox Company and referred to herein as “BW PGG”) in the United States District Court for the District of Colorado (Case No. 14-cv-00638-CMA-NYW) alleging breach of contract, negligence, fraud and other claims arising out of BW PGG's delivery of a circulating fluidized bed boiler and related equipment used in the Lamar Repowering Project pursuant to a 2005 contract.
A jury trial took place in mid-November 2016. Some of ARPA’s claims were dismissed by the judge during the trial. The jury’s verdict on the remaining claims was rendered on November 21, 2016. The jury found in favor of B&W with respect to ARPA’s claims of fraudulent concealment and negligent misrepresentation and on one of ARPA’s claims of breach of contract. The jury found in favor of ARPA on the three remaining claims for breach of contract and awarded damages totaling $4.2 million, which exceeded the previous $2.3 million accrual we established in 2012 by $1.9 million. We increased our accrual by $1.9 million in the fourth quarter of 2016. At September 30, 2017 and December 31, 2016, $4.2 million was included in other accrued liabilities in our consolidated balance sheet, and we have posted a bond pending resolution of post-trial matters.
ARPA also requested that pre-judgment interest of $4.1 million plus post-judgment interest at a rate of 0.77% compounded annually be added to the judgment, together with certain litigation costs. The court granted ARPA $3.7 million of pre-
judgment interest on July 21, 2017, which we recorded in our June 30, 2017 condensed consolidated financial statements in other accrued liabilities and interest expense. B&W commenced an appeal of the judgment on August 18, 2017, and ARPA filed a notice of cross appeal on August 31, 2017.
Stockholder litigation
On March 3, 2017 and March 13, 2017, the Company and certain of its officers were named as defendants in two separate but largely identical complaints alleging violations of the federal securities laws. The complaints were brought on behalf of a putative class of investors who purchased the Company's common stock between July 1, 2015 and February 28, 2017 and were filed in the United States District Court for the Western District of North Carolina (collectively, the "Stockholder Litigation"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. During the third quarter of 2017, the plaintiff further amended its complaint. As amended, the complaint now purports to cover investors who purchased shares between June 17, 2015 and August 9, 2017.
The plaintiff in the Stockholder Litigation alleges fraud, misrepresentation and a course of conduct relating to the facts surrounding certain projects underway in the Company's Renewable segment, which, according to the plaintiff, had the effect of artificially inflating the price of the Company's common stock. The plaintiff further alleges that stockholders were harmed when the Company disclosed on February 28, 2017 and August 9, 2017 that it would incur losses on these projects. The plaintiff seeks an unspecified amount of damages.
We believe the allegations in the Stockholder Litigation are without merit, and that the outcome of the Stockholder Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 20 – DERIVATIVE FINANCIAL INSTRUMENTS
Our foreign currency exchange ("FX") forward contracts that qualify for hedge accounting are designated as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At September 30, 2017 and 2016, we had deferred approximately $2.5 million and $3.4 million, respectively, of net gains on these derivative financial instruments in accumulated other comprehensive income ("AOCI").
At September 30, 2017, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled $121.2 million at September 30, 2017 with maturities extending to November 2019. These instruments consist primarily of contracts to purchase or sell euros and British pounds sterling. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions party to our United States revolving credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our United States revolving credit facility. During the third quarter of 2017, our hedge counterparties removed the lines of credit supporting new FX forward contracts. Subsequently, we have not entered into any new FX forward contracts.
The following tables summarize our derivative financial instruments:
|
| | | | | | |
| Asset and Liability Derivative |
(in thousands) | September 30, 2017 | December 31, 2016 |
Derivatives designated as hedges: | | |
Foreign exchange contracts: | | |
Location of FX forward contracts designated as hedges: | | |
Accounts receivable-other | $ | 1,694 |
| $ | 3,805 |
|
Other assets | 750 |
| 665 |
|
Accounts payable | 542 |
| 1,012 |
|
Other liabilities | 183 |
| 213 |
|
| | |
Derivatives not designated as hedges: | | |
Foreign exchange contracts: | | |
Location of FX forward contracts not designated as hedges: | | |
Accounts receivable-other | $ | 1,238 |
| $ | 105 |
|
Accounts payable | 2,594 |
| 403 |
|
Other liabilities | 8 |
| 7 |
|
The effects of derivatives on our financial statements are outlined below:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | 2016 | | 2017 | 2016 |
Derivatives designated as hedges: | | | | | |
Cash flow hedges | | | | | |
Foreign exchange contracts | | | | | |
Amount of gain (loss) recognized in other comprehensive income | $ | 398 |
| $ | 1,419 |
| | $ | 2,642 |
| 5,476 |
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location: | | | | | |
Revenues | 2,092 |
| 1,940 |
| | 8,094 |
| 4,524 |
|
Cost of operations | 159 |
| 24 |
| | 113 |
| 57 |
|
Other-net | (7,930 | ) | (445 | ) | | (7,438 | ) | (1,065 | ) |
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location: | | | | | |
Other-net | (7,005 | ) | 1,607 |
| | (10,524 | ) | 3.408 |
|
| | | | | |
Derivatives not designated as hedges: | | | | | |
Forward contracts | | | | | |
Loss recognized in income by location: | | | | | |
Other-net | $ | (1,364 | ) | $ | (154 | ) | | $ | (1,709 | ) | $ | (567 | ) |
NOTE 21 – 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, 2021 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 7,804 | | $ | 7,804 | | $ | 0 | | |
Mutual funds | 645 | | 0 | | 645 | | |
United States Government and agency securities | 4,757 | | 4,757 | | 0 | | |
Total fair value of available-for-sale securities | $ | 13,206 | | $ | 12,561 | | $ | 645 | | |
|
| | | | | | | | | | | | | |
(in thousands) | | | | | |
Available-for-sale securities | September 30, 2017 | | Level 1 | Level 2 | Level 3 |
Commercial paper | $ | 5,394 |
| | $ | — |
| $ | 5,394 |
| $ | — |
|
Mutual funds | 1,286 |
| | — |
| 1,286 |
| — |
|
U.S. Government and agency securities | 7,243 |
| | 7,243 |
| — |
| — |
|
Total fair value of available-for-sale securities | $ | 13,923 |
| | $ | 7,243 |
| $ | 6,680 |
| $ | — |
|
| | | | | | | | | | | | |
(in thousands) | | | | |
Available-for-sale securities | December 31, 2020 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 6,139 | | $ | 6,139 | | $ | 0 | | |
Mutual funds | 636 | | 0 | | 636 | | |
Corporate Stocks | 4,168 | | 4,168 | | 0 | | |
United States Government and agency securities | 4,365 | | 4,365 | | 0 | | |
Total fair value of available-for-sale securities | $ | 15,308 | | $ | 14,672 | | $ | 636 | | |
|
| | | | | | | | | | | | | |
(in thousands) | | | | | |
Available-for-sale securities | December 31, 2016 | | Level 1 | Level 2 | Level 3 |
Commercial paper | $ | 6,734 |
| | $ | — |
| $ | 6,734 |
| $ | — |
|
Certificates of deposit | 2,251 |
| | — |
| 2,251 |
| — |
|
Mutual funds | 1,152 |
| | — |
| 1,152 |
| — |
|
Corporate bonds | 750 |
| | 750 |
| — |
| — |
|
U.S. Government and agency securities | 7,104 |
| | 7,104 |
| — |
| — |
|
Total fair value of available-for-sale securities | $ | 17,991 |
| | $ | 7,854 |
| $ | 10,137 |
| $ | — |
|
Available-For-Sale Securities
|
| | | | | | | | | |
Derivatives | September 30, 2017 | | December 31, 2016 |
Forward contracts to purchase/sell foreign currencies | $ | 355 | | | $ | 2,940 | |
Available-for-sale securities
We estimate the fair value of available-for-sale securities based on quoted market prices. Our investments in available-for-sale securities are presented in "other assets"other assets on our condensed consolidated balance sheets.Condensed Consolidated Balance Sheets with contractual maturities ranging from 0-5 years.
DerivativesSenior Notes
Derivative assets and liabilities currently consistOn February 12, 2021, we completed a Senior Notes offering, as described in Note 13, of FX forward contracts. Where applicable, the$160 million aggregate principal amount of 8.125% Senior Notes due 2026. The fair value of these derivative assets and liabilitiesthe Senior Notes 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.based on readily available quoted market prices as of March 31, 2021.
| | | | | | | | | |
(in thousands) | March 31, 2021 | |
Senior Notes | Carrying Value | Estimated Fair Value | |
8.125% Senior Notes due 2026 ('BWSN') | $ | 160,000 | | $ | 169,536 | | |
Other financial instrumentsFinancial 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 sheetsCondensed Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
•Last Out Term Loans and Revolving debtDebt. 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 instrumentsLast Out Term Loans approximated their carrying value at September 30, 2017March 31, 2021 and December 31, 2016.
Non-recurring2020. The fair value measurementsof our Revolving Debt approximated their carrying value at December 31, 2020.
The purchase price allocation associated with the January 11, 2017 acquisition of Universal required significant fair value measurements using unobservable inputs. •Warrants. The fair value of the acquired intangible assetswarrants was determinedestablished using the income approach (see Note 4).Black-Scholes option pricing model value approach.
The other-than-temporary impairment
NOTE 22– RELATED PARTY TRANSACTIONS
Transactions with B. Riley
Based on its Schedule 13D filings, B. Riley beneficially owns 33.2% of our equity method investmentoutstanding common stock as of March 31, 2021.
B. Riley is party to the Last Out Term Loans as described in TBWES (see Note 11) required significant15.
We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 and amended the agreement on November 9, 2020 to retain the services of Mr. Kenny Young, to serve as our Chief Executive Officer until December 31, 2023, 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.
Total fees associated with B. Riley related to the Last Out Term Loans and services of Mr. Kenny Young, both as described above, were $0.2 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.
On November 13, 2020 we entered into an agreement with B. Riley Principal Merger Corp. II, an affiliate of B. Riley, to purchase 200,000 shares of Class A common stock of Eos Energy Storage LLC for an aggregate purchase price of $2.0 million. The shares were sold in January 2021 for which the Company recognized net proceeds of $4.5 million.
The public offering of our Senior Notes in February 2021, as described in Note 13, was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on February 12, 2021, we paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction cost related to the Senior Notes offering.
The public offering of our common stock, as described in Note 14, was conducted pursuant to the Underwriting Agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. Also on February 12, 2021, we paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial in the Exchange, as described in Note 13.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $150.0 million of 8.125% senior notes due 2026 to or through B. Riley Securities, Inc., as described in Note 13.
Refer to Note 25 for additional related party transactions with B. Riley and its affiliates regarding the subsequent events in conjunction with the public offering of the 7.75% Series A Cumulative Perpetual Preferred Stock between the Company and B. Riley Securities, Inc., as representative of the several underwriters.
Transactions with Vintage Capital Management, LLC
On March 26, 2021, Vintage and B. Riley completed a transaction pursuant to which B. Riley agreed to purchase from Vintage, and Vintage agreed to sell to B. Riley, all 10,720,785 shares of our common stock owned by Vintage.
Based on its Schedule 13D filings, Vintage beneficially owns 0% of our outstanding common stock as of March 31, 2021.
NOTE 23 – ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Assets Held for Sale
Certain fixed assets for the Copley, Ohio location were sold on March 15, 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033.
In December 2019, we determined that a small business within the B&W Thermal segment met the criteria to be classified as held for sale. At December 31, 2020, the carrying value of the net assets planned to be sold approximated the estimated fair value measurements using unobservable inputs ("Level 3" inputsless costs to sell. Refer to Divestitures below as defined inthis sale closed March 5, 2021.
The following table summarizes the fair value hierarchy established by FASB Topic Fair Value Measurements and Disclosures). We determined the impairment charge by first determining an estimate of the price that could be received to sell the assets and transfer the liabilities held by TBWES in an orderly transaction between market participants at June 30, 2017. The fair value of TBWES's net assets was determined through a combination of the cost approach, a market approach and an income approach.
Our interim goodwill impairment test and third quarter impairment charge required significant fair value measurements using unobservable inputs (see Note 13). The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on an income approach using a discounted cash flow analysis, a market approach using multiples of revenue and EBITDA of guideline companies, and a market approach using multiples of revenue and EBITDA from recent, similar business combinations. The faircarrying value of the assets and liabilities held for sale at March 31, 2021 and December 31, 2020:
| | | | | | | | |
(in thousands) | March 31, 2021 | December 31, 2020 |
Accounts receivable – trade, net | $ | 0 | | $ | 2,103 | |
Accounts receivable – other | 0 | | 86 | |
Contracts in progress | 0 | | 458 | |
Inventories | 0 | | 1,676 | |
Other current assets | 0 | | 405 | |
Current assets held for sale | 0 | | 4,728 | |
| | |
Net property, plant and equipment | 1,870 | | 10,365 | |
Intangible assets | 0 | | 759 | |
Right-of-use-asset | 0 | | 32 | |
Non-current assets held for sale | 1,870 | | 11,156 | |
| | |
Total assets held for sale | $ | 1,870 | | $ | 15,884 | |
| | |
Accounts payable | $ | 0 | | $ | 5,211 | |
Accrued employee benefits | 0 | | 178 | |
Advance billings on contracts | 0 | | 370 | |
Accrued warranty expense | 0 | | 466 | |
Operating lease liabilities | 0 | | 32 | |
Other accrued liabilities | 0 | | 2,048 | |
Current liabilities held for sale | 0 | | 8,305 | |
| | |
Total liabilities held for sale | $ | 0 | | $ | 8,305 | |
Divestitures
Effective March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, to BPE Clyde Pte Ltd. for $2.8 million. We received $2.0 million in gross proceeds before expenses and recorded an $0.8 million favorable contract asset for the Renewable and SPIG reporting units determined under Step 2amortization period from March 8, 2021 through December 31, 2023. We recognized a $0.4 million pre-tax gain, inclusive of the goodwill impairment test were basedrecognition of $4.5 million of CTA, on either an income or market approach.
The measurementthe sale of the net actuarial loss associated with our Canadian pension plan was determined using unobservable inputs (see Note 16). These inputs includedbusiness in the estimated discount rate, expected return on plan assets and other actuarial inputsthree months ended March 31, 2021.
On March 17, 2020, we fully settled the remaining escrow associated with the plan participants.sale of PBRRC and received $4.5 million in cash.
The determinationDiscontinued Operations
On April 6, 2020, we fully settled the remaining escrow associated with the sale of the estimated fair value of the related party share repurchase required significant fair value measurements using unobservable inputs (see Note 18). We utilized a discounted cash flow modelMEGTEC and estimates of our weighted average cost of capital on the transaction date to derive the estimated fair value of the share repurchase.Universal businesses and received $3.5 million in cash.
NOTE 22 – SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 2017 and 2016, we recognized the following non-cash activity in our condensed consolidated financial statements:
|
| | | | | | |
(in thousands) | 2017 | 2016 |
Accrued capital expenditures in accounts payable | $ | 1,118 |
| $ | 2,543 |
|
During the nine months ended September 30, 2017 and 2016, we recognized the following cash activity in our condensed consolidated financial statements:
|
| | | | | | |
(in thousands) | 2017 | 2016 |
Income tax payments (refunds), net | $ | (11,190 | ) | $ | 11,289 |
|
Interest payments on our United States revolving credit facility | $ | 2,876 |
| $ | 40 |
|
Interest payments on our second lien term loan facility | $ | 2,492 |
| $ | — |
|
NOTE 2324 – NEW ACCOUNTING STANDARDS
We adopted the following accounting standard during the first quarter of 2021:
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. The impact of this standard on our condensed consolidated financial statements was immaterial.
New accounting standards not yet adopted that could affect our consolidated financial statementsCondensed Consolidated Financial Statements in the future are summarized as follows:
In May 2014,March 2021, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. 2021-01, Reference Rate Reform (Topic 848): Scope. The newamendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting standardapply to derivatives that are affected by the discounting transition. This update is an amendment to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting, which was issued in March 2020 and provides a comprehensive modeloptional expedients and exceptions for applying generally accepted accounting principles to usecontracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in accountingthe updates 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 updates do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for revenue from contracts with customers and will replace mosthedging relationships existing revenue recognition guidance when it becomes effective. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses; determining ifas of December 31, 2022, that an entity ishas elected certain optional expedients for and that are retained through the principal or agentend of the hedging relationship. The amendments in a revenue arrangement; and technical corrections and improvements on topics including: contract costs, loss provisions on construction and production contracts and disclosures for remaining and prior-period performance obligations. The new accounting standard also requires more detailed disclosures to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The new accounting standard isboth updates are effective for interim and annual reporting periods beginning after December 15, 2017, and permits retrospectively applying the guidance to each prior reporting period presented (full retrospective method) or prospectively applying the guidance and providing additional disclosures comparing results to previous guidance, with the cumulative effect of initially applying the guidance recognized in beginning retained earnings at the date of initial application (modified retrospective method). We have developed a cross-functional team of B&W professionals from across each of our reportable segments and an implementation plan to adopt the new accounting standard. To date, we have analyzed our primary revenue streams and performed a detailed review of a sample of key contracts representative of our products and services in order to assess potential changes in our processes, systems, internal controls and the timing and method of revenue recognition and related disclosures. Based on our preliminary assessment, we do not expect the timing of revenue recognition to change significantlyall entities upon adoption of the new accounting standard; however, we are still assessing the impact to process, systems, internal controls and disclosures. We plan to adopt the new accounting standard on January 1, 2018 under the modified retrospective method. The FASB has issued,issuance and may issue in the future, interpretative guidance, which may cause our evaluationbe adopted any date on or after March 12, 2020 up to change. Our evaluation will include the existing, uncompleted contracts at that time the new accounting standard is adopted, and as a result, we will not be able to make a final determination aboutDecember 31, 2022. We are currently evaluating the impact of adopting the new accounting standard until the first quarter of 2018.
In January 2016, the FASB issued ASU 2016-1, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new accounting standard is effective for us beginning in 2018, but early adoption is permitted. The new accounting standard requires investments such as available-for-sale securities to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). With adoption of this standard, lessees will have to recognize almost all leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. The new accounting standard is effective for us beginning in 2019. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Of the eight classification-related changes this new standard will require in the statement of cash flows, only two of the classification requirements are relevant to our historical cash flow statement presentation (presentation of debt prepayments and presentation of distributions from equity method investees). However, the new classification requirements would not have changed our historical statement of cash flows. The new standard is effective for us beginning in 2018. We do not plan to early adopt the new accounting standard because the impact is not expected to be material to our consolidated statement of cash flows when adopted.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business in an effort to make the guidance more consistent. The guidance provides a test for determining when a group of assets and business activities is not a business, specifically, when substantially all of the fair value of the gross assets acquired or disposed of are concentrated in a single identifiable asset or group of assets, and if inputs and substantive processes that significantly contribute to the ability to create outputs is not present. The new accounting standard is effective for us beginning in 2018. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance removes the requirement to compare implied fair value of goodwill with the carrying amount, therefore impairment charges would be recognized immediately by the amount which carrying value exceeds fair value. The new accounting standard is effective beginning in 2020. We are currently assessing the impact that adopting this new accounting standard will have on our financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost. The new guidance classifies service cost as the only component of net periodic benefit cost presented in cost of operations, whereas the other components will be presented in other income. This will affect not only how we present net periodic benefit cost, but also how we present segment gross profit and operating income upon adoption. The new accounting standard is effective for us beginning in 2018. We have
assessed the impact of adopting the new standard on our consolidated statement of operations and determined the required reclassifications will primarily impact our Power segment's gross profit. The changes in the classification of the historical components of net periodic benefit costs are summarized in the following table:
|
| | | | | | | | |
Pension & other postretirement benefit costs (benefits) |
(in thousands) | December 31, 2016 | December 31, 2015 | Current classification | Future classification |
Service cost | $ | 1,703 |
| $ | 13,701 |
| Cost of operations | Cost of operations |
Interest cost | 41,772 |
| 50,644 |
| Cost of operations | Other income (expense) |
Expected return on plan assets | (61,939 | ) | (68,709 | ) | Cost of operations | Other income (expense) |
Amortization of prior service cost | 250 |
| 307 |
| Cost of operations | Other income (expense) |
Recognized net actuarial losses - mark to market adjustments | 24,110 |
| 40,210 |
| Cost of operations or SG&A expenses | Other income (expense) |
Net periodic benefit cost (benefit) | $ | 5,896 |
| $ | 36,153 |
| | |
New accounting standards that were adopted during the nine months ended September 30, 2017 are summarized as follows:
In the nine months ended September 30, 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting. This new accounting standard has affected how we account for share-based payments, with the most significant impact being the impact of income taxes associated with share-based compensation. Subsequent to adoption, the income tax effects related to share-based payments will be recorded as a component of income tax expense (or benefit) as they occur, rather than being classified as a component of additional paid-in capital. In addition, the effect of excess tax benefits will now be presented in the cash flow statement as an operating activity. We prospectively adopted the new accounting standard. See Note 7 for the effect on the statement of operations for the three and nine months ended September 30, 2017.
In the nine months ended September 30, 2017, the Company adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This new accounting standard requires that first-in, first-out inventory be measured at the lower of cost or net realizable value. Under GAAP prior to the adoption of this new accounting standard, inventory was measured at the lower of cost or market, where market was defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value minus a normal profit margin. Although this new accounting standard raises the threshold on when charges against inventory can occur, we do not expect a significant impact because we have not had significant inventory charges in the past. We prospectively adopted the new accounting standard and it had no impact on our condensed consolidated financial statementsstatements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40). The amendments in this update simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity by removing major separation models required under current U.S. GAAP. The amendments also improve the three or nine months ended September 30, 2017.consistency of diluted earnings per share calculations. The amendments in this update are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. 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.
NOTE 2425 – SUBSEQUENT EVENTEVENTS
In the third quarter of 2017 and through the date of this report,2021 Preferred Stock Offerings
On May 7, 2021, we have announced plans to implement restructuring actions to improve our global cost structure and increase our financial flexibility. The restructuring actions includecompleted a workforce reduction at both the business segment and corporate levels totaling approximately 9%public offering of our global workforce, SG&A expense reductions7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and new cost control measures,B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for gross proceeds of approximately $100.0 million before deducting underwriting discounts, commissions and office closuresestimated offering expenses. We have granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of the Preferred Stock in connection with the offering. Net proceeds from the offering were approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and consolidationsis perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in non-core geographies. These actions includearrears.
The Preferred Stock will, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up, rank: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all our existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. We will pay cumulative cash dividends on the Preferred Stock when, as and if declared by our Board of Directors (or a duly authorized committee of our Board of Directors), only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to 7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Series A Preferred Stock declared by our board of directors (or a duly authorized committee of our board of directors) will be payable quarterly in arrears on March 31, June 30, September 30 and December 31, beginning on June 30, 2021.
The net proceeds of the offering are intended to be used for general corporate purposes, including clean energy growth initiatives, potential future acquisitions and reduction of approximately 30% of B&W Vølund's workforce, which will right-size its workforce to operate under a new execution model focused on B&W's core boiler, grate and environmental equipment technologies, with the balance of plant and civil construction scope being executed by a partner. We believe the new B&W Vølund business model provides the Company with a lower risk profile and aligns with B&W's strategy of being an industrial and power equipment technology and solutions provider. Other actions are focused on productivity and efficiency gains to enhance profitability and cash flows, and to mitigate the impact of lower demand in the global coal-fired power market. Total estimated costs associated with these restructuring actions are anticipated to be approximately $20 million, most of which will be recognized in the fourth quarter of 2017, and the estimated annual savings arenet leverage.
The Preferred Stock is expected to be approximately $45 millionbegin trading on the NYSE under the symbol “BW PRA” within 30 business days of the closing date.
Revolving Debt - A&R Credit Agreement
On May 10, 2021, we entered into Amendment No. 5 to Amended and Restated Credit Agreement with Bank of America, N.A., in 2018.
its capacity as administrative agent (“A&R Amendment No. 5”). A&R Amendment No. 5 amends the terms of our A&R Credit Agreement to, among other matters, (i) permit the payment of dividends on the Preferred Stock and (ii) permit certain future issuances of Preferred Stock to B. Riley, a related party, in exchange for deemed prepayments of amounts outstanding under our A&R Credit Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customers to payment for work performed. Backlog may not be indicative of future operating results, and projectscontracts in our backlog may be canceled, modified or otherwise altered by customers. Backlog can vary significantly from period to period, particularly when large new build projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. Additionally, because we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.