Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | $ Change | | 2017 | 2016 | $ Change |
Revenues: | | | | | | | |
Power segment | $ | 202,222 |
| $ | 211,749 |
| $ | (9,527 | ) | | $ | 612,274 |
| $ | 762,293 |
| $ | (150,019 | ) |
Renewable segment | 108,557 |
| 124,344 |
| (15,787 | ) | | 262,168 |
| 293,593 |
| (31,425 | ) |
Industrial segment | 99,288 |
| 76,809 |
| 22,479 |
| | 281,734 |
| 147,275 |
| 134,459 |
|
Eliminations | (1,364 | ) | (1,947 | ) | 583 |
| | (6,540 | ) | (4,882 | ) | (1,658 | ) |
| 408,703 |
| 410,955 |
| (2,252 | ) | | 1,149,636 |
| 1,198,279 |
| (48,643 | ) |
Gross profit (loss): | | | | | | | |
Power segment | 40,629 |
| 48,896 |
| (8,267 | ) | | 132,653 |
| 170,903 |
| (38,250 | ) |
Renewable segment | 181 |
| 18,592 |
| (18,411 | ) | | (100,119 | ) | 14,468 |
| (114,587 | ) |
Industrial segment | 9,461 |
| 14,601 |
| (5,140 | ) | | 34,240 |
| 33,506 |
| 734 |
|
Intangible amortization expense included in cost of operations | (2,984 | ) | (7,752 | ) | 4,768 |
| | (11,455 | ) | (8,833 | ) | (2,622 | ) |
Mark to market adjustments included in cost of operations | — |
| (580 | ) | 580 |
| | (954 | ) | (30,079 | ) | 29,125 |
|
| 47,287 |
| 73,757 |
| (26,470 | ) | | 54,365 |
| 179,965 |
| (125,600 | ) |
Goodwill impairment charges | (86,903 | ) | — |
| (86,903 | ) | | (86,903 | ) | — |
| (86,903 | ) |
SG&A expenses | (59,225 | ) | (59,615 | ) | 390 |
| | (192,742 | ) | (179,225 | ) | (13,517 | ) |
Restructuring activities and spin-off transaction costs | (3,775 | ) | (2,395 | ) | (1,380 | ) | | (8,910 | ) | (38,021 | ) | 29,111 |
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Research and development costs | (2,291 | ) | (2,361 | ) | 70 |
| | (7,454 | ) | (8,273 | ) | 819 |
|
Intangible amortization expense included in SG&A | (1,016 | ) | (1,018 | ) | 2 |
| | (2,999 | ) | (3,071 | ) | 72 |
|
Mark to market adjustments included in SG&A | — |
| (64 | ) | 64 |
| | (106 | ) | (465 | ) | 359 |
|
Equity in income of investees | 1,234 |
| 2,827 |
| (1,593 | ) | | 4,813 |
| 4,887 |
| (74 | ) |
Impairment of equity method investment | — |
| — |
| — |
| | (18,193 | ) | — |
| (18,193 | ) |
Gains (losses) on asset disposals, net | (59 | ) | 2 |
| (61 | ) | | (63 | ) | 17 |
| (80 | ) |
Operating income (loss) | $ | (104,748 | ) | $ | 11,133 |
| $ | (115,881 | ) | | $ | (258,192 | ) | $ | (44,186 | ) | $ | (214,006 | ) |
Condensed and consolidated results of operations
Three months ended September 30, 2017 vs. 2016March 31, 2024 and 2023
Revenues decreased by $2.3$33.7 millionto $408.7$207.6 million in the third quarter of 2017three months ended March 31, 2024 as compared to $411.0$241.3 million in the third quarter of 2016. Anticipated decreasesthree months ended March 31, 2023. Thedecrease was primarily driven by a $22.1 million decrease in construction activities associated with new build and retrofitB&W Renewable segment revenue because fewer waste-to-energy projects were performed in the Power segmentcurrent year as, consistent with our stated strategy, we shift our focus to our higher-margin and lower-risk European Renewable parts and services business and a $6.2 million decrease in B&W Thermal segment revenue as a large project in our U.S. construction business was completed in 2023 that was not fully replaced in 2024.
Operating income for the revenue recognized in the Renewable segment resulting from ongoing performance challenges on our renewable energy contracts were partially offset by the increase in revenue in the Industrial segment resulting from the acquisition of Universal on January 11, 2017.
In the third quarter of 2017, we had consolidated gross profit of $47.3 million, which compares to gross profit of $73.8 million in the third quarter of 2016, a decrease of $26.5 million. The primary drivers of the decrease were the six uncompleted European loss contracts in the Renewable segment (see Note 5 in the condensed consolidated financial statements), productivity issues on new build cooling system projects in the Industrial segment and the volume impact of the decline in the Power segment's revenues, which were partially offset by the gross profit contribution from the Universal acquisition. Intangible asset amortization expense is discussed in further detail in the sections below.
Our goodwill impairment charges, restructuring expense and equity in income of investees are discussed in further detail in the sections below.
Ninethree months ended September 30, 2017 vs. 2016
Revenues decreased by March 31, 2024 was $48.6 million to $1.15 billion in the nine months ended September 30, 2017 as compared to $1.20 billion for the corresponding nine month period in 2016. The primary decreases were in construction activities associated with new build and retrofit projects in the Power segment and a decrease in the revenue recognized in the Renewable segment resulting from ongoing performance challenges on six of our renewable energy contracts. These declines were partially offset by the increase in revenue in the Industrial segment resulting from the acquisitions of SPIG and Universal.
Gross profit decreased by $125.6 million to $54.4 million in the nine months ended September 30, 2017 as compared to $180.0 million in the corresponding period in 2016. The primary drivers of the decrease were the six uncompleted European loss contracts in the Renewable segment (see Note 5 in the condensed consolidated financial statements) and the impact of the decline in the Power segment's revenues, which were partially offset by gross profit contributions from the SPIG and Universal acquisitions. Intangible asset amortization expense is discussed in further detail in the sections below.
Excluding amortization of intangible assets and pension mark to market adjustments, SG&A expenses increased by $13.5 million in the nine months ended September 30, 2017 to $192.74.3 million as compared to $179.2$1.3 million in the corresponding nine month periodthree months ended March 31, 2023. The increase in 2016,2024 was driven by a $6.6 million reduction in Selling, general and administrative costs primarily relatedattributable to addinga favorable final settlement of a liability to the SPIGformer owner of B&W Solar, and Universal businesses and ongoing project support activities in the Renewable segment, partially offset by savings from our 2016 restructuring actions. Intangible asset amortization expense and pension mark to market adjustments are discussed in further detail in the sections below.
Equity in income of investees during the nine months ended September 30, 2017 includes a $18.2$3.4 million other-than-temporary-impairment of our investment in Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") that we recorded in the second quarter of 2017. The impairment charge was a result of the strategic change we and our joint venture partner have madelower gross margin due to the declinereduced revenue. Gross margin is defined as Revenues less Cost of Sales. Loss from continuing operations increased by $3.1 million to $15.8 million in forecasted market opportunities in India.
Our goodwill impairment charges and restructuring expense are discussed in further detail in the sections below.
Power
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| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | $ Change | | 2017 | 2016 | $ Change |
Revenues | $ | 202,222 |
| $ | 211,749 |
| $ | (9,527 | ) | | $ | 612,274 |
| $ | 762,293 |
| $ | (150,019 | ) |
Gross profit | $ | 40,629 |
| $ | 48,896 |
| $ | (8,267 | ) | | $ | 132,653 |
| $ | 170,903 |
| $ | (38,250 | ) |
Gross margin % | 20 | % | 23 | % | | | 22 | % | 22 | % | |
Threethe three months ended September 30, 2017 vs. 2016
Revenues decreased 4%, or $9.5 million,March 31, 2024 as compared to $202.2$12.7 million in the third quarter of 2017, compared to $211.7three months ended March 31, 2023. The increase was driven by a $5.1 million inLoss on debt extinguishment as the corresponding quarter in 2016. The revenue decrease is attributable to the anticipated decline in the coal power generation market, and primarily impacted our new build utility and environmental product and service line due to a decrease in construction activity. We resized our business in anticipation of these declines with our 2016 restructuring actions. Partially offsetting the revenue decrease was an increase in revenuesremaining deferred financing fees associated with our retrofits product and service line in the third quarter of 2017 compared to the corresponding quarter in 2016.terminated PNC Revolving Credit Agreement were written off.
Gross profit decreased 17%, or $8.3 million, to $40.6 million in the quarter ended September 30, 2017, compared to gross profit of $48.9 million in the corresponding quarter in 2016. We were able to largely maintain our gross margin percentage as a result of the 2016 restructuring actions, which partially offset the gross profit effect of lower sales volumes. Compared to the third quarter of 2016, the primary decrease in gross profit in the third quarter of 2017 was attributable to the decrease in gross profit from a lower volume of construction activity associated with our new build utility and environmental equipment product and service line. Also contributing to the decrease were fewer net improvements on projects that were completed this year versus last year.
Nine months ended September 30, 2017 vs. 2016
Revenues decreased 20%, or $150.0 million, to $612.3 million in the nine months ended September 30, 2017, compared to $762.3 million in the corresponding nine month period in 2016. The revenue decrease is attributable to the anticipated decline in the coal power generation market discussed above. Compared to the nine months ended September 30, 2016, the primary decrease in revenues in the nine months ended September 30, 2017 was attributable to a decline new build utility and environmental equipment and retrofit projects primarily due to a decrease in construction activity. Partially offsetting those declines in revenues was an increase in industrial steam generation revenues in the nine months ended September 30, 2017 compared to the corresponding nine month period in 2016.
Gross profit decreased 22%, or $38.3 million, to $132.7 million in the nine months ended September 30, 2017, compared to $170.9 million in the corresponding nine month period in 2016. We were able to maintain our gross margin percentage as a result of the 2016 restructuring actions, which partially offset the gross profit effect of lower sales volumes. Compared to the nine months ended September 30, 2016, the decrease in gross margins are attributable to the same reasons discussed in the three month explanations above.
Renewable
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| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | $ Change | | 2017 | 2016 | $ Change |
Revenues | $ | 108,557 |
| $ | 124,344 |
| $ | (15,787 | ) | | $ | 262,168 |
| $ | 293,593 |
| $ | (31,425 | ) |
Gross profit (loss) | $ | 181 |
| $ | 18,592 |
| $ | (18,411 | ) | | $ | (100,119 | ) | $ | 14,468 |
| $ | (114,587 | ) |
Gross margin % | — | % | 15 | % |
| | (38 | )% | 5 | % |
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Three months ended September 30, 2017 vs. 2016
Revenues decreased 13%, or $15.8 million, to $108.6 million in the third quarter of 2017, compared to $124.3 million in the corresponding quarter in 2016. The number of contracts and level of activity in the segment during the third quarter of 2017 and 2016 were comparable. The $15.8 million decrease in revenue in the third quarter of 2017 was primarily attributable to revisions in our estimates of progress and estimated liquidated damages on six of our renewable energy contracts.
Gross profit decreased $18.4 million in the third quarter of 2017 to $0.2 million, compared to $18.6 million in the corresponding quarter in 2016. The decrease was primarily a result of six renewable energy loss contracts that remained uncompleted as of September 30, 2017.The loss contracts are not expected to contribute any gross profit to the Renewable segment throughout 2017 unless there are revisions to our estimated revenues or costs at completion in future periods.
Nine months ended September 30, 2017 vs. 2016
Revenues decreased 11% in the nine months ended September 30, 2017 to $262.2 million, compared to $293.6 million in the corresponding nine month period in 2016. The number of contracts and level of activity in the segment during the nine months ended September 30, 2017 and 2016 were comparable. The decrease in revenues in the nine months ended September 30, 2017 is due to the same reasons noted in the three month explanations above.
Gross profit decreased in the nine months ended September 30, 2017 to a loss of $100.1 million, compared to gross profit of $14.5 million in the corresponding nine month period in 2016. Changes in estimates to complete our renewable energy contracts resulted in $123.8 million in charges during the nine months ended September 30, 2017.
See Note 5 in the condensed consolidated financial statements for additional information on the impact of the segment's renewable energy contracts on our results of operations in the third quarters and nine months ended September 30, 2017 and 2016.
Industrial
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| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | $ Change | | 2017 | 2016 | $ Change |
Revenues | $ | 99,288 |
| $ | 76,809 |
| $ | 22,479 |
| | $ | 281,734 |
| $ | 147,275 |
| $ | 134,459 |
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Gross profit | $ | 9,461 |
| $ | 14,601 |
| $ | (5,140 | ) | | $ | 34,240 |
| $ | 33,506 |
| $ | 734 |
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Gross margin % | 10 | % | 19 | % |
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| | 12 | % | 23 | % |
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Three months ended September 30, 2017 vs. 2016
Revenues increased 29%, or $22.5 million, to $99.3 million in the third quarter of 2017, compared to $76.8 million in the corresponding quarter in 2016. The increase in revenues in the Industrial segment is attributable to organic growth from new build cooling systems projects, complemented by the acquisition of Universal on January 11, 2017, which added $16.0 million of revenue in the third quarter of 2017.
Gross profit decreased 35%, or $5.1 million, to $9.5 million in the third quarter of 2017, compared to $14.6 million in the corresponding quarter in 2016. The acquisition of Universal contributed $3.3 million of gross profit in the third quarter of 2017. The year-over-year net decrease in gross margin percentage reflects product mix, as new build cooling system projects generally have lower margins than other products and services in the segment. In addition, the Industrial segment's gross profit in the third quarter of 2017 also was affected by productivity issues on new build cooling system projects. The productivity issues caused us to increase project cost estimates and deploy additional resources to complete the projects on time.
Nine months ended September 30, 2017 vs. 2016
Revenues increased 91%, or $134.5 million, to $281.7 million in the nine months ended September 30, 2017, compared to $147.3 million in the corresponding nine month period in 2016. The increase in revenues in the Industrial segment is primarily attributable to the July 1, 2016 acquisition of SPIG and the January 11, 2017 acquisition of Universal, which together added $193.1 million of revenue in the nine months ended September 30, 2017. Partially offsetting the increase is a $20.4 million decline in revenues attributable to environmental solutions sales in the United States, primarily in the first half of 2017.
Gross profit increased 2%, or $0.7 million, to $34.2 million in the nine months ended September 30, 2017, compared to $33.5 million in the corresponding nine month period in 2016. The acquisitions of SPIG and Universal contributed $12.6 million of
gross profit in the nine months ended September 30, 2017. The year-over-year decrease in gross margins are attributable to the same reasons discussed in the three month explanations above.
Bookings and backlogBacklog
Bookings and backlog are our measures of remaining performance obligations under our sales contracts. In addition, we monitor Implied Bookings and Backlog, which are bookings (backlog) plus amounts related to projects that have been awarded to us but are not measures recognized by generally accepted accounting principles.fully under contract and/or projects under contract that are not yet fully released for performance. We believe these metrics provide investors, lenders and other users of our financial statements with a leading indicator of future revenues. It is possible that our methodology for determining bookings and backlog may not be comparable to methods used by other companies.
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. Additionally,Backlog can vary significantly from period to period, particularly when large new-build conversion projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. 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.
Bookings represent changes to the backlog. Bookings include additions related to our backlog.booking new business or increases in project scope, subtractions due to customer cancellations or reductions in scope, changes in estimates that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods, and that shorter termshorter-term changes in bookings may not necessarily indicate a material trend.
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| Three Months Ended March 31, | | |
(in approximate millions) | 2024 | | 2023 | | | | |
B&W Renewable | $ | 60.1 | | | $ | 78.9 | | | | | |
B&W Environmental | 43.2 | | | 64.8 | | | | | |
B&W Thermal | 106.5 | | | 104.0 | | | | | |
Other/eliminations | (2.8) | | | (0.7) | | | | | |
Bookings | $ | 207.0 | | | $ | 247.0 | | | | | |
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| Three months ended September 30, | Nine months ended September 30, |
(In millions) | 2017 | 2016 | 2017 | 2016 |
Power | $122 | $198 | $476 | $623 |
Renewable | 35 | (2) | 86 | 124 |
Industrial | 100 | 70 | 360 | 133 |
Other/eliminations | (2) | — | (40) | — |
Bookings | $255 | $266 | $881 | $880 |
Implied bookings(1) as of March 31, 2024 and 2023 were as follows: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in approximate millions) | 2024 | | 2023 | | | | |
B&W Renewable | $ | 70.2 | | | $ | 78.9 | | | | | |
B&W Environmental | 69.8 | | | 70.7 | | | | | |
B&W Thermal | 363.4 | | | 108.8 | | | | | |
Other/eliminations | (2.8) | | | (0.7) | | | | | |
Bookings | $ | 500.6 | | | $ | 257.7 | | | | | |
(1) Implied bookings are bookings plus projects that are awarded or under contract but not fully released for performance. B&W Renewable included $10.1 million in additional implied bookings for the three months ended March 31, 2024. B&W Environmental included $26.6 million and $5.9 million in additional implied bookings for the three months ended March 31, 2024 and 2023, respectively. B&W Thermal included $256.9 million and $4.8 million in additional implied bookings for the three months ended March 31, 2024 and 2023, respectively. |
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(In approximate millions) | September 30, 2017 | December 31, 2016 | September 30, 2016 |
Power | $482 | $618 | $668 |
Renewable | 1,064 | 1,241 | 1,289 |
Industrial | 317 | 216 | 233 |
Other/eliminations | (37) | (3) | — |
Backlog | $1,826 | $2,072 | $2,190 |
Backlog as of March 31, 2024 and 2023 was as follows:
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| As of March 31, |
(in approximate millions) | 2024 | | 2023 |
B&W Renewable(1) | $ | 148.0 | | | $ | 196.5 | |
B&W Environmental | 166.1 | | | 172.6 | |
B&W Thermal | 209.1 | | | 251.6 | |
Other/eliminations | 9.6 | | | 7.3 | |
Backlog | $ | 532.8 | | | $ | 628.0 | |
(1) B&W Renewable backlog above excludes $117.6 millionand $52.9 million as of March 31, 2024 and March 31, 2023 respectively related to O&M contracts that are recognized as disposed.
Implied backlog(1) as of March 31, 2024 and 2023 was as follows:
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| As of March 31, |
(in approximate millions) | 2024 | | 2023 |
B&W Renewable(2) | $ | 158.1 | | | $ | 196.5 | |
B&W Environmental | 192.7 | | | 178.5 | |
B&W Thermal | 466.0 | | | 256.3 | |
Other/eliminations | 9.6 | | | 7.3 | |
Backlog | $ | 826.4 | | | $ | 638.6 | |
(1) Implied backlog is backlog plus projects that are awarded or under contract but not fully released for performance. B&W Renewable included $10.1 million in additional implied backlog for the three months ended March 31, 2024. B&W Environmental included $26.6 million and $5.9 million in additional implied backlog for the three months ended March 31, 2024 and 2023, respectively. B&W Thermal included $256.9 million and $4.8 million in additional implied backlog for the three months ended March 31, 2024 and 2023, respectively.
(2) B&W Renewable implied backlog above excludes $117.6 millionand $52.9 million as of March 31, 2024 and March 31, 2023 respectively related to O&M contracts that are recognized as disposed.
Of the backlog at September 30, 2017,March 31, 2024, we expect to recognize revenues as follows:
| | | | | | | | | | | | | | |
(in approximate millions) | 2024 | 2025 | Thereafter | Total |
B&W Renewable | $ | 120.5 | | $ | 23.6 | | $ | 3.9 | | $ | 148.0 | |
B&W Environmental | 106.3 | | 40.8 | | 19.0 | | 166.1 | |
B&W Thermal | 171.2 | | 32.7 | | 5.2 | | 209.1 | |
Other/eliminations | 9.6 | | — | | — | | 9.6 | |
Expected revenue from backlog | $ | 407.6 | | $ | 97.1 | | $ | 28.1 | | $ | 532.8 | |
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| | | | |
(In approximate millions) | 2017 | 2018 | Thereafter | Total |
Power | $155 | $157 | $170 | $482 |
Renewable | 129 | 232 | 703 | 1,064 |
Industrial | 71 | 246 | — | 317 |
Other/eliminations | — | 6 | (43) | (37) |
Backlog | $355 | $641 | $830 | $1,826 |
Changes in Contract Estimates
Goodwill impairmentDuring the three months ended March 31, 2024 and 2023, we recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2024 | | 2023 |
Increases in gross profit for changes in estimates for over time contracts | $ | 6,964 | | | $ | 5,401 | |
Decreases in gross profit for changes in estimates for over time contracts | (3,891) | | | (4,243) | |
Net changes in gross profit for changes in estimates for over time contracts | $ | 3,073 | | | $ | 1,158 | |
Non-GAAP Financial Measures
We recorded goodwill impairment chargesuse non-GAAP financial measures internally to evaluate our performance and in making financial and operational decisions. When viewed in conjunction with GAAP results and the accompanying reconciliation, we believe that the presentation of $86.9 million ($85.8 millionthese measures provides investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for the related financial results prepared in accordance with GAAP.
The following discussion of our business segment results of operations includes a discussion of Adjusted EBITDA on a consolidated basis, which is a non-GAAP metric and differs from the most directly comparable GAAP measure. Adjusted EBITDA on a consolidated basis is defined as the sum of the adjusted EBITDA for each of the segments, further adjusted for corporate allocations and research and development costs. At a segment level, the adjusted EBITDA presented below is consistent with the way our chief operating decision maker reviews the results of operations and makes strategic decisions about the business and is calculated as earnings before interest, tax, depreciation and amortization adjusted for items such as gains or losses arising from the sale of non-income producing assets, net pension benefits, restructuring activities, impairments, gains and losses on debt extinguishment, costs related to financial consulting, research and development costs and other costs that may not be directly controllable by segment management and are not allocated to the segment.We present consolidated adjusted EBITDA because we believe it is useful to investors to facilitate comparisons of tax)the ongoing, operating performance before corporate overhead and other expenses not attributable to the operating performance of our revenue-generating segments.
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| Three Months Ended March 31, |
(in thousands) | 2024 | | 2023(2) |
Net loss | $ | (16,791) | | | $ | (12,475) | |
(Loss) income from discontinued operations, net of tax | (992) | | | 211 | |
Loss from continuing operations | (15,799) | | | (12,686) | |
Interest expense, net | 12,527 | | | 12,543 | |
Income tax expense | 1,293 | | | 490 | |
Depreciation & amortization | 4,409 | | | 5,269 | |
EBITDA | 2,430 | | | 5,616 | |
| | | |
Benefit plans, net | (96) | | | 109 | |
Loss on asset sales, net | 53 | | | 937 | |
Stock compensation | 1,350 | | | 3,227 | |
Restructuring activities and business services transition costs | 1,580 | | | 960 | |
Settlements and related legal costs, net | (4,087) | | | (2,463) | |
| | | |
Loss on debt extinguishment | 5,071 | | | — | |
Acquisition pursuit and related costs | 84 | | | 134 | |
Product development (1) | 1,619 | | | 1,370 | |
Foreign exchange | 1,333 | | | 461 | |
Financial advisory services | 214 | | | — | |
Contract disposal | 585 | | | 1,387 | |
| | | |
| | | |
Letter of credit fees | 2,388 | | | 1,643 | |
Other - net | 11 | | | 193 | |
Adjusted EBITDA | $ | 12,535 | | | $ | 13,574 | |
(1) Costs associated with development of commercially viable products that are ready to go to market.
(2) Certain 2023 amounts have been reclassified in the third quarter of 2017, which included a $50.0 million charge in the Renewable reporting unit and a $36.9 million charge in the SPIG reporting unit. The reasons for the charges and related assumptions made by management are described in Note 13reconciliation to conform to the condensed consolidated financial statements. The third quarter 2017 impairment charges eliminated all of the Renewable reporting unit's goodwill balance at September 30, 2017, and $38.0 million of the SPIG reporting unit's goodwill balance remains after the impairment charge; long-lived assets2024 presentation.
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2024 | | 2023 |
Adjusted EBITDA | | | |
B&W Renewable | $ | 1,658 | | | $ | 4,322 | |
B&W Environmental | 3,326 | | | 1,906 | |
B&W Thermal | 13,672 | | | 13,733 | |
Corporate | (6,005) | | | (5,080) | |
Research and development costs | (116) | | | (1,307) | |
| $ | 12,535 | | | $ | 13,574 | |
Corporate
Corporate costs in the two reporting units were not impaired.
SG&A expenses
adjusted EBITDA include SG&A expenses excluding intangible asset amortization expensethat are not allocated to the reportable segments. These costs include, among others, certain executive, compliance, strategic, reporting and pension marklegal expenses associated with governance of the organization and being an SEC registrant. Corporate expenses not allocated to market adjustments, decreased by $0.4the reportable segments totaled $6.0 million to $59.2and $5.1 million in the third quarter of 2017, as compared to $59.6 million in the third quarter of 2016. The primary reasons for the decrease are the $8.7 million of SG&A savings from our 2016 restructuring focused on the Power segment and $0.5 million lower acquisition and integration costs, partially offset by $4.1 million of increased costs to support ongoing Renewable projects and a $4.7 million increase resulting from the Universal acquisition and other support activities in the Industrial segment.
SG&A expenses, excluding intangible asset amortization expense and pension mark to market adjustments, increased by $13.5 million in the ninethree months ended September 30, 2017March 31, 2024 and 2023, respectively. The increase is primarily due to $192.7 million, as compared to $179.2 million in the nine months ended September 30, 2016. SG&A increased by $20.2 million from the SPIG and Universal acquisitions, and $13.3 million to support ongoing Renewable projects, partially offset by $21.9 milliontiming of savings from our 2016 restructuring actions focused on the Power segment.expenses incurred for professional fees.
Research and development expenses
Our research and development activities are focused on improving our products through innovations to reduce their cost and improve competitiveness and/or reduce performance risk of our products to better meet our and our customers’ expectations.
Research and development expenses totaled $0.1 million and $1.3 million in the three months ended March 31, 2024 and 2023, respectively. In 2024, the focus of our development activities shifted to our BrightLoopTM and ClimateBrightTM portfolio, which is captured in the Product development category.
Benefit plans, net
We recognize benefits from our defined benefit and other postretirement benefit plans based on actuarial calculations primarily because expected return on assets is greater than service cost. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits for defined benefit and other postretirement benefits plans before MTM were a benefit of $0.1 million for the three months ended March 31, 2024 and expense of $0.1 million for the three months ended March 31, 2023, respectively.
Our pension costs include MTM adjustments and are primarily a result of changes in the discount rate, curtailments and settlements. Any MTM charge or gain should not be considered to be representative of future MTM adjustments as such events are not currently predicted and are in each case subject to market conditions and actuarial assumptions as of the date of the event giving rise to the MTM adjustment. There were no MTM adjustments for the three months ended March 31, 2024 or 2023.
Refer to Note 12 to the Condensed Consolidated Financial Statements for further information regarding our pension and other postretirement plans.
Loss on asset sales, net
We, at times, will sell or dispose of certain assets that are unrelated to our operations, therefore, we believe it is useful to exclude these gains and losses from our non-GAAP financial measures in order to highlight the performance of the business. We had $0.1 million and $0.9 million in losses on sales in the three months ended March 31, 2024 and 2023, respectively.
Stock Compensation
The grant date fair value of stock compensation varies based on the derived stock price at the time of grant, valuation methodologies, subjective assumptions, and reward types. This may make the impact of this form of compensation on our current financial results difficult to compare to previous and future periods. Therefore, we believe it is useful to exclude stock-based compensation from our non-GAAP financial measures in order to highlight the performance of the business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies.
Expenses related to restricted stock units are recorded at the Corporate level and are recognized on a straight-line basis over a 3-year vesting period, except for market-based restricted stock units which are recognized over a derived service period.
Stock compensation was $1.4 million and $3.2 million for the three months ended March 31, 2024 and 2023, respectively.
Restructuring activities and business service transition costs
Restructuring activities and business services transition actions across our business units and corporate functions resulted in expense of $1.6 million and $1.0 million in the three months ended March 31, 2024 and 2023, respectively. The restructuring charges primarily consist of severance and related costs associated with non-recurring actions taken to transform our operations with impacts on employees and facilities used in our businesses. Business services transition costs relate to new technology implementation, expected to provide future benefit and are included in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
Settlements and related legal costs
Settlements and related legal costs were a benefit of $4.1 million and $2.5 million in the three months ended March 31, 2024 and 2023, respectively. The current year benefit is driven by the favorable final settlement of amounts owed to the former owner of B&W Solar, offset by expenses related to several smaller litigation matters. The benefit in the prior year was driven by a $2.5 million litigation settlement.
Product development
Our product development activities include expenses that relate to sales, marketing, and other business development expenses for products and services still under development and improvementnot yet widely available. Product development expenses totaled $1.6 million and $1.4 million in the three months ended March 31, 2024 and 2023, respectively. The increase resulted primarily from timing of newspecific research and existing productsincreased development efforts and equipment,activities related to our BrightLoopTM commercialization efforts and to further develop our ClimateBrightTM portfolio. Management excludes these expenses from adjusted EBITDA as wellthey often may not correlate to revenue or other operations occurring in the current period.
Foreign exchange
Foreign exchange was a loss of $1.3 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively.
We translate assets and liabilities of our foreign operations into U.S. dollars at current exchange rates, and we translate items in the statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as conceptuala component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and engineering evaluationlosses in the Condensed Consolidated Statements of Operations.
Financial advisory services
We had financial advisory services of $0.2 million in the three months ended March 31, 2024. There were no financial advisory services in 2023.
Contract Disposal
We are in the process of exiting our only remaining fixed fee operational and maintenance ("O&M") contract in our Renewable segment. Losses related to this contract totaled $0.6 million and $1.4 million in the three months ended March 31, 2024 and 2023, respectively. We believe it is useful to exclude the impact of this contract on our operating results in order to highlight the performance of the ongoing business.
Letter of credit fees
Letter of credit fees included in Cost of operations were $2.4 million and $1.6 million for translation into practical applications.the three months ended March 31, 2024 and 2023, respectively. Letter of credit fees are routinely incurred in the course of executing customer contracts. A portion of the fees are included in the contract prices with our customers. These expenses wereamounts represent performance guarantees akin to insurance that are not passed along to our customers and are excluded from adjusted EBITDA as they do not reflect the performance of the business.
Interest Expense
Interest expense in the Condensed Consolidated Financial Statements consisted of the following components:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2024 | | 2023 | | | | | | |
Components associated with borrowings from: | | | | | | | | | |
Senior notes | $ | 6,271 | | | $ | 6,328 | | | | | | | |
| | | | | | | | | |
U.S. Revolving Credit Facility | 1,532 | | | — | | | | | | | |
| 7,803 | | | 6,328 | | | | | | | |
Components associated with amortization or accretion of: | | | | | | | | | |
Revolving Credit Agreement | 1,149 | | | 984 | | | | | | | |
Senior notes | 644 | | | 619 | | | | | | | |
| | | | | | | | | |
| 1,793 | | | 1,603 | | | | | | | |
| | | | | | | | | |
Components associated with interest from: | | | | | | | | | |
Lease liabilities | 548 | | | 724 | | | | | | | |
LOC interest and fees | 2,189 | | | 2,822 | | | | | | | |
Other interest expense | 501 | | | 1,179 | | | | | | | |
| 3,238 | | | 4,725 | | | | | | | |
| | | | | | | | | |
Total interest expense | $ | 12,834 | | | $ | 12,656 | | | | | | | |
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(In thousands, except for percentages) | 2024 | | 2023 | | $ Change | | | | | | |
Loss before income taxes | $ | (14,506) | | | $ | (12,196) | | | $ | (2,310) | | | | | | | |
Income tax expense | $ | 1,293 | | | $ | 490 | | | $ | 803 | | | | | | | |
Effective tax rate | (8.9) | % | | (4.0) | % | | | | | | | | |
Income tax expense in the first quarter of 2024 reflects a full valuation allowance against our net deferred tax assets, except in Mexico, Canada, the United Kingdom, Brazil, Finland, Germany, Thailand, the Philippines, Indonesia, and Sweden. Deferred tax assets are evaluated each period to determine whether realization is more likely than not. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Valuation allowances may be removed in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework of ASC 740, Income Taxes ASC 740.
The effective tax rate for the first quarter of 2024 is not reflective of the United States statutory rate primarily due to a valuation allowance against certain net deferred tax assets and unfavorable discrete items. In certain jurisdictions where we anticipate a loss for the fiscal year or incurs a loss for the year-to-date period for which a tax benefit cannot be realized in accordance with ASC 740, we exclude the loss in that jurisdiction from the overall computation of the estimated annual effective tax rate.
Depreciation and Amortization
Depreciation expense was $2.1 million and $2.9 million in the three months ended March 31, 2024 and 2023, respectively.
Amortization expense was $2.3 million and $2.4 million in the three months ended March 31, 2024 and 2023, respectively.
RESULTS BY SEGMENT
B&W Renewable Segment Results
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2024 | | 2023 | | $ Change |
Revenues | $ | 52,281 | | | $ | 84,123 | | | $ | (31,842) | |
Adjusted EBITDA | $ | 1,658 | | | $ | 4,322 | | | $ | (2,664) | |
Three months ended March 31, 2024 and 2023
Revenues in the B&W Renewable segment decreased38% or$31.8 million, to $52.3 million in the three months ended March 31, 2024 compared to $84.1 million in the three months ended March 31, 2023. Consistent with our stated strategy, fewer waste-to-energy projects were performed in the current year as we shift our focus to our higher-margin and lower-risk European Renewable parts and services business, leading to a decrease in revenue of $22.1 million.
Adjusted EBITDA in the B&W Renewable segment decreased $2.7 million, to $1.7 million in the three months ended March 31, 2024 compared to $4.3 million in the three months ended March 31, 2023 driven by a decrease of $3.6 million due to the reduced volume of waste-to-energy projects, partially offset by an increase of $1.1 million attributable to the European Renewable parts and services business.
B&W Environmental Segment Results
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2024 | | 2023 | | $ Change |
Revenues | $ | 48,354 | | | $ | 39,440 | | | $ | 8,914 | |
Adjusted EBITDA | $ | 3,326 | | | $ | 1,906 | | | $ | 1,420 | |
Three months ended March 31, 2024 and 2023
Revenues in the B&W Environmental segment increased 23%, or $8.9 million to $48.4 million in the three months ended March 31, 2024 compared to $39.4 million in the three months ended March 31, 2023. The increase is primarily driven by higher revenue of $2.0 million in SPIG, our Air-Cooled Condenser business, and $2.1 million in our Allen-Sherman-Hoff ("ASH") ash handling business, as well as slightly increased volume in our parts business.
Adjusted EBITDA in the B&W Environmental segment was $3.3 million in the three months ended March 31, 2024 compared to $1.9 million in the three months ended March 31, 2023. The increase is primarily attributable to the higher revenue from SPIG and ASH projects and improved operating performance as certain environmental projects were completed in the quarter.
B&W Thermal Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
(In thousands) | 2024 | | 2023 | | $ Change | | | | | | | | | | | | |
Revenues | $ | 110,187 | | | $ | 119,236 | | | $ | (9,049) | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 13,672 | | | $ | 13,733 | | | $ | (61) | | | | | | | | | | | | | |
Three months ended March 31, 2024 and 2023
Revenues in the B&W Thermal segment decreased8%, or $9.0 million to $110.2 million in the three months ended March 31, 2024 compared to $119.2 million in the three months ended March 31, 2023. A large project in our U.S. construction business was active in 2023 and was not fully replaced in 2024, resulting in decreased revenue of $6.2 million.
Adjusted EBITDA in the B&W Thermal segment was unchanged at $13.7 million in the three months ended March 31, 2024 and 2023, as an increase in international sales of $1.6 million was largely offset by the decreased Adjusted EBITDA in the U.S. construction business.
Liquidity and Capital Resources
Liquidity
Our primary liquidity requirements include debt service, funding of dividends on preferred stock and working capital needs. We fund our liquidity requirements primarily through cash generated from operations, external sources of financing, including our Axos Credit Agreement and senior notes, and equity offerings, including the Sales Agreement (as defined below) and our Preferred Stock, each of which are described in the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report in further detail.
On April 10, 2024, we entered into a sales agreement (the "Sales Agreement") with B. Riley Securities, Inc., Seaport Global Securities LLC, Craig-Hallum Capital Group LLC and Lake Street Capital Markets, LLC (together, the "Agents"), in connection with the offer and sale from time to time of shares of our common stock, having an aggregate offering price of up to $50.0 million, through the Agents. As of May 3, 2024, 1.5 million shares have been sold pursuant to the Sales Agreement. Refer to Note 22 to the Condensed Consolidated Financial Statement for additional discussion of the quarter ended September 30, 2017 and 2016, respectively, and $7.5Sales Agreement.
We have recurring operating losses primarily due to losses recognized on our B&W Solar business as described in Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of our Form 10-K filed on March 15, 2024 as well as higher debt service costs. Our net cash used in operating activities was $14.9 million and $8.3$12.9 million for the ninethree months ended September 30, 2017March 31, 2024 and 2016,2023, respectively. We continuously evaluate each researchOur assessment of our ability to fund future operations is inherently subjective, judgment-based and development projectsusceptible to change based on future events. Currently, with existing cash on hand and collaborate with our business teams to ensure that we believeavailable liquidity, we are developing technologyprojecting insufficient liquidity to fund operations through one year from the date this Quarterly Report is issued. These conditions and products that are currently desired by the market and will result in future sales.events raise substantial doubt about our ability to continue as a going concern.
Restructuring
2017 Restructuring activities
In response to the third quarter of 2017conditions, we are implementing several strategies to obtain the required funding for future operations, and through the date of this report, we have announced plans to implement restructuring actionsare considering other alternative measures to improve cash flow, including suspension of the dividend on our global cost structure and increase our financial flexibility.Preferred Stock. The restructuringfollowing actions include a workforce reduction at bothoccurred during the business segment and corporate levels totaling approximately 9%three months ended March 31, 2024:
•entered into advanced negotiations related to the sale of one of our global workforce, SG&A expense reductions and new cost control measures, and office closures and consolidations in non-core geographies. These actions include 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, withnon-strategic businesses. Proceeds from the balance-of-plant and civil construction scope being executed by a partner. We believe the new B&W Vølund business model provides us with a lower risk profile and aligns with our 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 savingssale are expected to be approximately $45$40.0 million in 2018.
Pre-2017 Restructuring activities
Our series of restructuring activities prior to 2017 were intended$46.0 million, subject to help us maintain margins, make our costs more variabledue diligence and allow our business tocontinuing negotiations. We cannot provide any assurances that such transaction will close or that proceeds will not be more flexible. We madeor less than we anticipate;
•initiated the sale process of certain of our manufacturing costs more volume-variable through the closurenon-strategic businesses;
•filed for a waiver of manufacturing facilities and development of manufacturing arrangements with third parties. Also, we made our cost of engineering and supply chain more variable by creating a matrix organization capable of delivering products across multiple segments, and developing more volume-variable outsourcing arrangements with our joint venture partners and other third parties to meet fluctuating demand. This new matrix organization and operating model required different competencies and, in some cases, changes in leadership. While primarily applicable to our Power segment, our restructuring actions also benefit the Renewable and Industrial segments to a lesser degree. As demonstrated in our segment gross margin percentages, notwithstanding the challenges in our Renewable segment, we have achieved our objective of maintaining gross margins in the Power segment. Quantification of cost savings, however, is significantly dependent upon volume assumptions that have changed since the restructuring actions were initiated.
On June 28, 2016, we announced actions to restructure our power business in advance of lower projected demand for power generation from coal in the United States. These restructuring actions were primarily in the Power segment. Additionally, we announced leadership changes on December 6, 2016, which included the departure of members of management in our Renewable segment. The costs associated with these restructuring activities totaled $0.4 million and $4.0 million in the third quarter and nine months ended September 30, 2017, respectively, and were primarily related to $0.4 million and $2.4 million of employee severance in the third quarter and nine months ended September 30, 2017, respectively. This comparesminimum contributions to the $1.4 millionRetirement Plan for Employees of charges in the third quarter and nine months ended September 30, 2016, respectively, which consisted of $0.5 million of employee severance costs, a $0.1 million non-cash impairment of the long-lived assets at B&W's one coal power plant and $0.8 million of costs related to organizational realignment of personnel and processes. We expect additional restructuring charges of up to $0.1 million, primarily related to additional manufacturing facility consolidation initiatives that will extend through the fourth quarter of 2017.
The restructuring initiatives announced prior to 2016 were intended to better position us for growth and profitability. They have primarily been related to facility consolidation and organizational efficiency initiatives. Theses costs were $0.5 million and $0.6 million in the third quarter of 2017 and 2016, respectively. These costs were $1.0 million and $3.8 million in the nine months ended September 30, 2017 and 2016, respectively. We expect nominal additional restructuring charges during the fourth quarter of 2017, primarily related to facility demolition and consolidation activities.
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.Commercial Operations (the "U.S. Plan"). In, that if granted, would reduce cash funding requirements in 2024 and would increase contributions annually over the third quartersubsequent five-year period. We cannot provide any assurances that such waiver will be granted;
•initiated the process to sell several non-core real estate assets;
•initiated the sale of common shares pursuant to our At-The-Market Offering; and, nine months ended September 30, 2017, we recognized spin-off costs
•negotiated the settlement of $0.2 million and $1.0 million, respectively. In the third quarter and nine months ended September 30, 2016, we recognized spin-off costs of $0.4 million and $3.4 million, respectively. In the second quarter of 2017, we disbursed $1.9 million of the accrued retention awards. Approximately $0.5 million of such costs remain, which we expect to be recognized through June 30, 2018.
Equity in income (loss) of investees
Our primary equity method investees included joint ventures in China and India, each of which manufactures boiler parts and equipment. Excluding the impairment described below, Equity in income of investees in the third quarter of 2017 decreased $1.6 million to $1.2 million from $2.8 million in the third quarter of 2016. The decrease in equity income of investees in the third quarter of 2017 is primarily attributable to winding down the joint venture in India as described in Note 11a liability to the condensed consolidated financial statementsformer owner of B&W Solar at a discount, resulting in future cash savings of $7.2 million..
Based on our ability to raise funds through the actions noted above and to the December 22, 2016 saleour Cash and cash equivalents as of all of our interest in our former Australian joint venture, Halley & Mellowes Pty. Ltd. ("HMA"). HMA contributed $0.6 million and $1.5 million to our equity in income of investees in the third quarter of 2016 and the nine months ended September 30, 2016, respectively.
At September 30, 2017, our total investment in equity method investees was $87.4 million, which included a $58.7 million investment in Babcock & Wilcox Beijing Company, Ltd. ("BWBC"). Based in China, BWBC designs, manufactures and sells various power plant boilers and related aftermarket equipment. BWBC has been profitable historically, andMarch 31, 2024, we have determinedconcluded it is probable that no other-than-temporary-impairment has occurred based onsuch actions would provide sufficient liquidity to fund operations for the valuenext twelve months following the date of its cash on hand, long-lived assets and expected future cash flows.
Our investment in equity method investees also included a investment in TBWES, which has a manufacturing facility intended primarily for new build coal boiler projects in India. During the second quarter of 2017, both we and our joint venture partner decided to make a strategic change in the Indian joint venture due to the decline in forecasted market opportunities in India, which reduced the expected recoverable value of our investment in the joint venture.this Quarterly Report. As a result, it is probable that our cash flow improvement plans and anticipated proceeds from the sale of this strategic change, we recognizednon-strategic assets alleviate the substantial doubt about our ability to continue as a $18.2 million other-than-temporary-impairment of our investment in TBWES in the second quarter of 2017. The impairment charge was based on the difference in the carrying value of our investment in TBWESgoing concern.
Cash and our share of the estimated fair value of TBWES's net assets. After recording the impairment charge, our remaining investment in TBWES at September 30, 2017 was $26.0 million.Cash Flows
We assess our investments in unconsolidated affiliates for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other than temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated affiliate at fair value.
Intangible asset amortization expense
We recorded $4.0 million and $8.8 million of intangible amortization expense during the third quarters of 2017 and 2016, respectively, and $14.5 million and $11.9 million of expense during the nine months ended September 30, 2017 and 2016, respectively. The increase in amortization expense is attributable to our last two business combinations, which increased our intangible assets by $74.7 million.
We acquired $55.2 million of intangible assets in the July 1, 2016 acquisition of SPIG. Amortization of the SPIG intangible assets resulted in $1.9 million and $7.1 million of expense during the third quarter of 2017 and 2016, respectively, and $7.3 million and $7.1 million of expense during the nine months ended September 30, 2017 and 2016, respectively.
We acquired $19.5 million of intangible assets in the January 11, 2017 acquisition of Universal. Amortization of the Universal intangible assets resulted in $0.5 million in the third quarter of 2017 and $2.6 million of expense during the nine months ended September 30, 2017.
We expect total intangible amortization expense of $3.6 million in the fourth quarter of 2017.
Market to market adjustments
During 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 charges and mark to market adjustments are reflected in the $1.1 million "Recognized net actuarial loss." There were no significant plan settlements or interim mark to market adjustments during the second or third quarters of 2017.
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 "Recognized net actuarial loss."
Provision for income taxes
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | $ Change | | 2017 | 2016 | $ Change |
Income (loss) before income taxes | $ | (119,728 | ) | $ | 10,628 |
| $ | (130,356 | ) | | $ | (279,424 | ) | $ | (44,586 | ) | $ | (234,838 | ) |
Income tax expense (benefit) | $ | (5,639 | ) | $ | 1,617 |
| $ | (7,256 | ) | | $ | (7,644 | ) | $ | (790 | ) | $ | (6,854 | ) |
Effective tax rate | 4.7 | % | 15.2 | % | | | 2.7 | % | 1.8 | % | |
We operate in numerous countries that have statutory tax rates below that of the United States federal statutory rate of 35%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 19% and approximately 30%. In addition, the jurisdictional mix of our income (loss) before tax can be significantly affected by mark to market adjustments related to our pension and postretirement plans, which have been primarily in the United States, and the impact of discrete items.
Income (loss) before the provision for income taxes generated in the United States and foreign locations for the quarters ended September 30, 2017 and 2016 is presented in the table below.
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | 2016 | | 2017 | 2016 |
United States | $ | (3,653 | ) | $ | 8,831 |
| | $ | (41,070 | ) | $ | (20,611 | ) |
Other than United States | (116,075 | ) | 1,797 |
| | (238,354 | ) | (23,975 | ) |
Income (loss) before income taxes | $ | (119,728 | ) | $ | 10,628 |
| | $ | (279,424 | ) | $ | (44,586 | ) |
See Note 7 to the condensed consolidated financial statements for explanation of differences between our effective income tax rate and our statutory rate.
Liquidity and capital resources
At September 30, 2017, ourMarch 31, 2024, cash and cash equivalents, current restricted cash and long-term restricted cash totaled $48.1$102.5 million, and we had $209.7which included $58.6 million of restricted cash related to collateral for certain letters of credit. We had total borrowings ($247.2debt of $441.6 million face value before debt discounts).as well as $191.7 million of gross preferred stock outstanding. Our foreign business locations held $25.9 million of our total unrestricted cash and cash equivalents at March 31, 2024. In general, our foreign cash balances are not available to fund our United StatesU.S. operations unless the funds are repatriated or used to repay intercompany loans made from the United StatesU.S. to foreign entities, which could expose us to taxes we presently have not made a provision for in our results of operations. $44.8 million of our $48.1 million of unrestricted cash and cash equivalents at September 30, 2017 was held by foreign entities. We presently have no plans to repatriate these funds to the United States as we believe that our United States liquidity is sufficient to meet the anticipated cash requirements of our United States operations.
Historically, our primary sources of liquidity have been cash from operations, borrowings under our United States revolving credit facility and borrowings under foreign revolving credit facilities. Our borrowing capacity under our United States revolving credit facility is primarily limited by the financial covenants, which are most significantly affected by our trailing 12 months EBITDA (as defined in the credit agreement governing the facility). The significant loss accruals we recorded in the second quarter of 2017 and the fourth quarter of 2016 reduced our trailing 12 months EBITDA and, in turn, our ability to comply with our financial covenants. Accordingly, we amended our credit agreement in February 2017 and August 2017 to, among other things, provide covenant relief.
To provide additional liquidity, we entered into a second lien term loan facility on August 9, 2017 with an affiliate of American Industrial Partners ("AIP"). The second lien term loan facility consists of a second lien term loan in the principal amount of $175.9 million, all of which we borrowed on August 9, 2017, and a delayed draw term loan in the principal amount of $20.0 million, which may be drawn in a single draw prior to June 30, 2020, subject to certain conditions. On August 9, 2017, we used $125.0 million of the second lien term loan proceeds to repay borrowings outstanding under our United States revolving credit facility and pay fees and expenses related to the second lien term loan facility and the amendment of our United States revolving credit facility. The balance of the second lien term loan proceeds were used to repurchase approximately 4.8 million shares of our common stock held by an affiliate of AIP for approximately $50.9 million, which was one of the conditions precedent for the second lien term loan facility. As described in Note 18 to the
U.S.
condensed consolidated financial statements, the difference between the price paid for the shares and the estimated fair value of the shares repurchased was treated as a debt discount together with the direct financing costs.
We had approximately $94.7 million of availability under our United States revolving credit facility as of September 30, 2017. Based on the amended United States revolving credit and second lien term loan facilities, we believe we have adequate sources of liquidity at September 30, 2017 to meet our cash requirements. Our assessment is based on our operating forecast, backlog, cash on-hand, borrowing capacity, planned capital investments and ability to manage future discretionary cash outflows during the next 12 month period. We expect our operations to use cash over the full year of 2017 and into the first half of 2018, particularly in the Renewable segment, as we fund contract losses and work down advanced bill positions. Our forecasted use of cash over the next 12 months is expected to be funded in part through borrowings from our United States revolving credit facility. Our United States revolving credit facility allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs. After giving effect to the $50.0 million of unrestricted cash on hand required under our financial covenants, we expect to have between $73.0 million and $173.0 million of available borrowing capacity from our United States revolving credit facility during the next 12 months based on our forecast of the trailing 12 month EBITDA calculation and forecasted borrowings. We expect cash and cash equivalents, cash flows from operations, and our borrowing capacity under our United States revolving credit facility and second lien term loan facility to be sufficient to meet our liquidity needs for at least 12 months from the date of this filing.
Our net cashCash used in operations was $150.8$14.9 million in the ninethree months ended September 30, 2017, comparedMarch 31, 2024, which is primarily attributable to cashthe year-to-date net loss of $16.8 million. Cash used in operations of $39.8was $12.9 million in the ninethree months ended September 30, 2016. The change is partially attributableMarch 31, 2023, which was primarily attributed to the $228.3 million increase in ouryear-to-date net loss in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Also, a $13.0 million net decrease in cash outflows associated with changes in accounts receivable, contracts in progress and advanced billings in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted primarily from the timing of billings and stage of completion of large, ongoing contracts in our Renewable segment. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position. Our portfolio of Renewable energy contracts at both September 30, 2017 and December 31, 2016 included milestone payments from our customers in advance of incurring the contract expenses, and as a result we are in an advance bill position on most of these contracts at both dates. Because of the advanced bill positions, combined with the increase in expected costs to complete the Renewable loss contracts, we expect the use of cash by the Renewable segment to continue during 2017 and into the first half of 2018 until these contracts are completed. Partially offsetting these operating cash outflows was a $25.6 million decrease in operating cash outflows associated with changes in contract related accounts payable and accrued liabilities in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.$12.5 million.
Our net cashCash flows used in investing activities was $57.9$2.8 million and $2.2 million in the ninethree months ended September 30, 2017March 31, 2024 and $191.6 million in the nine months ended September 30, 2016. The net cash used in investing activities was2023, respectively, primarily attributabledue to the $52.5 million acquisition of Universal on January 11, 2017, net of $4.4 million cash acquired in the business combination (see Note 4 to the condensed consolidated financial statements). The net cash used in investing activities in the nine months ended September 30, 2016 included $143.0 million acquisition of SPIG, net of $26.0 million cash acquired, and a $26.2 million contribution to increase our interest in TBWES, our joint venture in India. Capital expenditures were $10.7 million and $20.4 million in the nine months ended September 30, 2017 and 2016, respectively.capital expenditures.
Our net cashCash flows provided by financing activities was $155.5of $51.3 million in the ninethree months ended September 30, 2017, comparedMarch 31, 2024, primarily due to $64.6 million of cash used in the nine months ended September 30, 2016. The cash provided by financing activities in the nine months ended September 30, 2017 was a result of net borrowings from our United States revolving credit facilityon the Axos Credit Agreement of $49.1$61.6 million, which were used to fund our working capital needs andoffset by the Universal acquisition. In addition, cash provided by financing activities in the nine months ended September 30, 2017 included proceeds from the issuancepayment of the second lien term loanpreferred dividend of $141.7 million, which were used to repurchase $16.7 million of shares from a related party, fund debt issuance costs and repay a portion of our United States revolving credit facility. The net cash$3.7 million. Cash flows used in financing activities was $5.9 million in the ninethree months ended September 30, 2016 isMarch 31, 2023, primarily attributabledue to repurchasesthe payment of $78.4the preferred stock dividend of $3.7 million and loan repayments of our common stock.$1.7 million.
Debt Facilities
United States revolving credit facility
On May 11, 2015,this Quarterly Report, we entered into a credit agreement with a syndicate of lenders ("Credit Agreement") in connection with our spin-off from The Babcock & Wilcox Company. Thenew Credit Agreement which is scheduledwith Axos in January 2024. B. Riley, a related party, has provided a guaranty of payment with regard to mature on June 30, 2020, provides for a senior secured revolving credit facility, initially in an aggregate amount of up to $600 million. The proceeds of loansour obligations under the Credit Agreement. This agreement substantially replaces the existing Reimbursement Agreement, are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit.
On February 24, 2017 and August 9, 2017, we entered into amendments to theRevolving Credit Agreement (the “Amendments” and theLetter of 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, (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), (13) prohibit us from exercising the accordion described below during the covenant relief period, (14) limit our financial and commercialAgreement. We are transitioning letters of credit outstanding under the AmendedLetter of Credit Agreement and Reimbursement Agreement to the Axos Credit Agreement. We believe all outstanding letters of credit will be transitioned to the Axos Credit Agreement by June 30, 2024, at which time the Letter of Credit Agreement and Reimbursement Agreement is expected to be terminated.
On April 30, 2024, we, along with certain subsidiaries as guarantors, the lenders party to the Credit Agreement , and Axos, as administrative agent, entered into the First Amendment to Credit Agreement (the “First Amendment”). The First Amendment, among other things, amends the terms of the Credit Agreement to $30.0 million duringincrease the covenant relief period, (15) require usamounts available 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 forthbe borrowed based on inventory in the Amended Credit Agreement are satisfied, but in no event earlier than the date on which we provide the compliance certificate for our fiscal quarter ended 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 commitmentsborrowing base 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 2.0:1.0 after giving pro forma effect thereto. During the covenant relief period, our ability to exercise the accordion feature will be prohibited.
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. 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:(the "Increased Inventory Period"). In 2024, the Increased Inventory Period commences on April 30 and ends on July 31 and would provide approximately $6.0 million additional available borrowings under the Credit Agreement. The Increased Inventory Period is available to us upon our election in subsequent years (subject to a $75,000 fee if we make such an election), and commences on March 1 and ends on July 31.
1.50:1.0 for the quarter ended September 30, 2017,
1.00:1.0 for each of the quarters ending December 31, 2017 andAt 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, 2017,2024, usage under the AmendedCredit Agreement and Letter of Credit Agreement consisted of $58.9 million in borrowings at an effective interest rate of 6.88%, $7.7$11.5 million of financial letters of credit and $87.2$68.1 million of performance letters of credit. At September 30, 2017, we had approximately $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 loss attributable to Vølund projects. At September 30, 2017, we were in compliance with all of the covenants set forth in the Amended Credit Agreement, and we forecast our compliance with the financial covenants to be closest to the minimum thresholds at March 31, 2018.2024.
We plan to execute the actions necessary to enable us to maintain compliance with the financialLetters of Credit, Bank Guarantees and other covenants described above. We believe we will accomplish our plans to maintain compliance with our financial and other covenants, and believe our cash on hand, proceeds from potential future asset sales, cash flows from operations and amounts available under our United States revolving credit facility will be adequate to enable us to fund our operations. However, there can be no assurance that we will be successful. Our ability to generate cash flows from operations, access funding under reasonable terms, contract business with reasonable terms and conditions and comply with our financial and other covenants may be impacted by a variety of business, economic, regulatory and other factors, which may be outsideSurety Bonds
Certain of our control. Such factors include, butsubsidiaries, that are not limited to: our ability to access capital markets and complete asset dispositions, delay or cancellation of projects, decreased profitability on our projects due to matters not reasonably forecasted, changes in the timing of cash flows on our projects due to the timing of receipts and required payments of liabilities and funding of our loss projects, the timing of approval or settlement of change orders and claims, changes in foreign currency exchange or interest rates, performance of pension plan assets or changes in actuarially determined liabilities. In addition, we could be impacted if our customers experience a material change in their ability to pay us or if the banks associated with our lending facilities were to cease or reduce operations. Also, we have what we believe is adequate capacity to provide letters of credit and secure surety bonds in support of current and future projects, but there can be no assurance that these will be renewed or available at reasonable commercial terms in the future.
Second lien term loan
On August 9, 2017, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of 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 we 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. Borrowings under the second lien term loan, other than the delayed draw term loan, bear interest at 10% per annum, and borrowings under the delayed draw term loan bear interest at 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% per annum. The second lien term loan has a scheduled maturity of December 30, 2020. Any delayed draw borrowings would also have a scheduled maturity of December 30, 2020. In connection with our entry into the second lien term loan facility, we used a portion of the proceeds from the second lien term loan to repurchase approximately 4.8 million shares of our common stock (approximately 10% of our shares outstanding) held by an affiliate of AIP for approximately $50.9 million, which was one of the conditions precedent for the second lien term loan facility.
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 periodic 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 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.
Foreign revolving credit facilities
Outsideprimarily 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 associatedassociation with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States revolving credit facilityoutside of our Letter of Credit Agreement as of September 30, 2017 and DecemberMarch 31, 20162024 was $279.1$39.0 million. The aggregate value of the outstanding letters of credit provided under the Letter of Credit Agreement backstopping letters of credit or bank guarantees was $17.2 million and $255.2as of March 31, 2024. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $48.0 million respectively.are subject to foreign currency revaluation.
We have posted surety bonds to support contractual obligations to customers relating to certain projects.contracts. 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 more than adequate to support our existing project requirements for the next 12 months. In addition, theseThese bonds generally indemnify customers should we fail to perform our obligations under theour applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds thosethe underwriters issue in support of some of our contracting activity. As of September 30, 2017,March 31, 2024, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $472.3$146.8 million. The aggregate value of the letters of credit backstopping surety bonds was $15.3 million.
Our ability to obtain and maintain sufficient capacity under our current debt facilities 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.
Other Indebtedness - Loans Payable
As of March 31, 2024, we had loans payable of $103.2 million, net of debt issuance costs of $0.5 million, of which $4.5 million is classified as current, and $98.7 million as long-term loans payable on the Consolidated Balance Sheet. This includes $90.1 million on the revolving debt facilities, which is comprised of $36.8 million drawn on the revolving credit portion of the facility and $53.3 million drawn on the letter of credit portion, and $12.1 million, net of debt issuance costs of $0.5 million, related to sale-leaseback financing transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements,Condensed Consolidated Financial Statements, see "Critical Accounting Policies"Policies and Estimates" in ourthe Annual Report.Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to our policies during the quarterthree months ended September 30, 2017.March 31, 2024 from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposuresexposure to market risks could changehas not changed materially from those disclosed under "Quantitative and Qualitative Disclosures About Market Risk" in ourthe Annual Report. Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents and our investment portfolio, which primarily consists of investments in United States Government obligations and highly liquid money market instruments denominated in United States dollars. We are averse to principal loss and seek to ensureReport on Form 10-K for the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investments are classified as available-for-sale.year ended December 31, 2023.
Although the condensed and consolidated balance sheets do not present debt at fair value, our second lien term loan facility is fixed-rate debt, the fair value of which could fluctuate as a result of changes in prevailing market rates. On September 30, 2017, its principal balance was $175.9 million. Our United States revolving credit facility is variable-rate debt, so its fair
value would not be significantly affected by changes in prevailing market rates. On September 30, 2017, its principal balance was $58.9 million.
We have operations in many foreign locations, and, as a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange ("FX") rates or weak economic conditions in those foreign markets. Our primary foreign currency exposures are Danish kroner, Great British pound, Euro, Canadian dollar, and Chinese yuan. In order to manage the risks associated with FX rate fluctuations, we attempt to hedge those risks with FX derivative instruments, but there can be no assurance that such instruments will be available to us on reasonable terms. Historically, we have hedged those risks with FX forward contracts. We do not enter into speculative derivative positions. 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.
Item 4. Controls and Procedures
Disclosure controlsControls and proceduresProcedures
As of the end of the period covered by this report, the Company'sour management, with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as(as that term is defined in Rules 13a-15(e) and 15d-15(e) ofadopted by the Securities and Exchange Commission under the Securities Exchange Act, of 1934, as amended (the "Exchange Act")). Disclosure controls
Based on this evaluation and procedures are the controls and processes that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures. Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. The design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot provide absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
On January 11, 2017, we acquired Universal, which would have represented approximately 3% of our total consolidated assets and consolidated revenues as of and for the year ended December 31, 2016, respectively. As the acquisition occurred during the last 12 months, the scope of our assessmentbecause of the effectiveness of disclosure controls and procedures does not includepreviously-reported material weaknesses in internal control over financial reporting, related to Universal. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our internal control over financial reporting scope in the year of acquisition.
Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded thethat our disclosure controls and procedures were not effective dueas of March 31, 2024.
Notwithstanding the conclusion by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures as of March 31, 2024 were not effective, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2024 and 2023 present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Remediation Plan and Status
As of March 31, 2024, the material weaknesses previously disclosed have not yet been remediated. In response to the material weaknessweaknesses in our internal control over financial reporting, that we reported for the quarter ended June 30, 2017 at Vølund, a business unit within our Renewable segment, which remains unremediated as of September 30, 2017. Our management has completed all steps designedinitiated remediation efforts, which includes:
•continuing to remediatehire qualified accounting professionals;
•developing and providing additional training to the accounting and financial reporting team;
•designing and implementing additional and/or enhanced controls in the areas of account reconciliations, contract accounting, financial statement analysis and complex and/or non-routine transactions;
•enhancing controls over IT user access and segregation of duties; and,
•developing and implementing a monitoring program to evaluate and assess whether controls are present and functioning appropriately.
We will continue to work towards full remediation of the material weakness at September 30, 2017; however, theweaknesses to improve our internal control over financial reporting. The material weakness at Vølund cannotweaknesses will not be considered remediated until the new processes and procedures have been in placeredesigned controls operate for a sufficient period of time and management has determinedconcluded, through testing, that thethese controls are effective. Management expectsdesigned and operating effectively. Accordingly, we will continue to monitor and evaluate the material weakness at Vølund will be remediated at December 31, 2017; however, our remediation plans cannot guarantee the material weakness will be remediated by a specific future date or at all.
We are committed to continuing to improveeffectiveness of our internal control over financial reporting and will continue to review our financial reporting processes and internal controls at Vølund. As we continue to evaluate and work to improve our internal control over financial reporting, we may identify additional measures to addressin the areas affected by the material weakness at Vølund. Our management, with the oversight of the audit and finance committee of our board of directors, will continue to assess and take steps to enhance the overall design and capability of our control environment in the future.weaknesses.
Changes in internal control over financial reportingInternal Control Over Financial Reporting
During the three months ended September 30, 2017, we finalized the implementation of a new financial consolidation, planning and reporting system. The new system replaces the legacy system we used under a service agreement with our former Parent. In connection with the implementation, we updated the processes that constitute our internal control over financial reporting, as necessary, to accommodate relatedThere were no changes to our accounting procedures and business processes. Although the processes that constitute our internal control over financial reporting have been affected by the system implementation, we do not believe the implementation of the financial consolidation, planning and reporting system has had or will have a material adverse effect on ourin internal control over financial reporting (as defined inby Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Management has taken steps to ensure that appropriate internal controls are designed and implemented. The new system and associated internal controls were subject to testing and data reconciliation during implementation.
Other than the system change described above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2017March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations in Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding ongoing investigations and litigation, see Note 1917 to the unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements included in Part I, Item I of this report,Quarterly Report, which we incorporate by reference into this Item.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under "Risk Factors"“Risk Factors” in ourthe Annual Report.Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes to suchthe risk factors.factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In August 2015,accordance with the provisions of the employee benefit plans, we announcedacquire shares in connection with the vesting of employee restricted stock that our Board of Directors authorized a share repurchase program. The following table provides information on our purchases of equity securities duringrequire us to withhold shares to satisfy employee statutory income tax withholding obligations. During the quarter ended September 30, 2017. AnyMarch 31, 2024, we did not have any repurchases of shares purchased that were not part of a publicly announced plan or program are related to repurchases of commonemployee restricted stock pursuant to the provisions of employee benefit plans that permit theplans. Also, we do not have a general share repurchase of shares to satisfy statutory tax withholding obligations.program at this time.
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Period | | Total number of shares purchased (1) (2) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) (3) |
July 1, 2017 - July 31, 2017 | | 3,620 | | $— | — | | $100,000 |
August 1, 2017 - August 31, 2017 | | 4,835,775 | | $10.52 | — | | $100,000 |
September 1, 2017 - September 30, 2017 | | 944 | | $— | — | | $100,000 |
Total | | 4,840,339 | | | — | | |
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(1) | Includes 3,620, 953 and 944 shares repurchased in July, August and September, respectively, pursuant to the provisions of employee benefit plans that require us to repurchase shares to satisfy employee statutory income tax withholding obligations. |
(2) | Includes 4,834,822 shares repurchased for $50,883,635 on August 9, 2017 from an affiliate of AIP in conjunction with the issuance of our second lien term loan facility. |
(3) | On August 4, 2016, we announced that our board of directors authorized the repurchase of an indeterminate number of our shares of common stock in the open market at an aggregate market value of up to $100 million over the next twenty-four months. As of November 8, 2017, we have not made any share repurchases under the August 4, 2016 share repurchase authorization. |
Item 6. Exhibits
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| | Amendment No. 3 dated August 9, 2017, to CreditMaster Separation Agreement, dated May 11,as of June 8, 2015, amongbetween The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc., as the Borrower, Bank of America, N.A., as administrative Agent and Lender, and the other Lenders party thereto (incorporated by reference to Exhibit 2.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)). |
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| | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)). |
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| | Certificate of Amendment of the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed August 15, 2017on June 17, 2019 (File No. 001-36876)). |
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| | Second Lien Credit Agreement, dated August 9, 2017, among Babcock & Wilcox Enterprises, Inc.,Certificate of Amendment of the Restated Certificate of Incorporation, as the Borrower, Lightship Capital LLC, as administrative Agent and Lender, and the other Lenders party theretoamended (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed August 15, 2017on July 24, 2019 (File No.001-36876)No. 001-36876)). |
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| | Certificate of Amendment of Amended and Restated Certificate of Incorporation(incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on May 23, 2023 (File No. 001-36876)).
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| | Amended and Restated Bylaws of the Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2021 (File No. 001-36876)). |
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| | AmendmentCertificate of Designations with respect to the 7.75% Series A Cumulative Perpetual Preferred Stock, dated May 6, 2021, filed with the Secretary of State of Delaware and effective on May 6, 2021 (incorporated by reference to Exhibit 3.4 to the Babcock & Wilcox Enterprises, Inc. Form 8-A filed on May 7, 2021 (File No. 4001-36876)). |
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| | Certificate of Increase in Number of Shares of 7.75% Series A Cumulative Perpetual Preferred Stock, dated September 20, 2017June 1, 2021 (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on July 7, 2021 (File No. 001-36876)). |
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| | Credit Agreement among Babcock & Wilcox Enterprises, Inc. and Axos Bank, dated May 11, 2015,as of January 18, 2024 (incorporated by reference to Exhibit 10.63 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Security and Pledge Agreement among Babcock & Wilcox Enterprises, Inc., and Axos Bank, dated as of January 18, 2024 (incorporated by reference to Exhibit 10.64 of the borrower, Bank of America, N.A. as Administrative Agent, and the other Lenders party theretoBabcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Fee Letter (Supplement to the Credit Agreement) among Babcock & Wilcox Enterprises, Inc., and Axos Bank, dated January 18, 2024 (incorporated by reference to Exhibit 10.65 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Guaranty by B. Riley Financial, Inc. in favor of Axos Bank, in its capacity as administrative agent for the Secured Parties (as defined in the Credit Agreement) dated January 18, 2024 (incorporated by reference to Exhibit 10.66 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Fee and Reimbursement Agreement Babcock & Wilcox Enterprises, Inc. and B. Riley Financial, Inc., dated as of January 18, 2024 (incorporated by reference to Exhibit 10.67 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Fourth Amendment to Reimbursement Security Agreement and Consent Letter by and among Babcock & Wilcox Enterprises, Inc., MSD PCOF Partners XLV, LLC and B. Riley Financial, Inc., dated March 15, 2024 (incorporated by reference to Exhibit 10.68 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K filed March 15, 2024 (File No. 001-36876)). |
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| | Sales Agreement, among Babcock & Wilcox Enterprises, Inc., B. Riley Securities, Inc., Seaport Global Securities LLC, Craig-Hallum Capital Group LLC and Lake Street Capital Markets, LLC (incorporated by reference to Exhibit 1.1 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed April 10, 2024 (File No. 001-36876)). |
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| | First Amendment to Credit Agreement among Babcock & Wilcox Enterprises, Inc. and Axos Bank, dated April 30, 2024, filed herein. |
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| | First Amendment to Fee Letter among Babcock & Wilcox Enterprises, Inc. and Axos Bank, dated April 30, 2024, filed herein. |
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| | Rule 13a-14(a)/15d-14(a) certification of Chief Executive OfficerOfficer. |
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| | Rule 13a-14(a)/15d-14(a) certification of Chief Financial OfficerOfficer. |
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| | Section 1350 certification of Chief Executive OfficerOfficer. |
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| | Section 1350 certification of Chief Financial OfficerOfficer. |
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101.INS101.SCH | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema DocumentDocument. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase DocumentDocument. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase DocumentDocument. |
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104 | | Cover Page Interactive Data File (embedded within the inline XBRL document) |
*Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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November 8, 2017 | | | BABCOCK & WILCOX ENTERPRISES, INC. |
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May 9, 2024 | By: | /s/ Louis Salamone |
| | By: | /s/ Daniel W. HoehnLouis Salamone |
| | | Daniel W. Hoehn |
| | | Executive Vice President, Controller &Chief Financial Officer and Chief Accounting Officer |
| | | (Principal Financial and Accounting Officer and Duly Authorized Representative) |
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