Basis of Presentation and Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Basis of Presentation and Significant Accounting Policies | NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
We have presented the consolidated financial statements of The Babcock & Wilcox Company (“B&W”) in U.S. dollars in accordance with accounting principles generally accepted in the United States (“GAAP”). |
We use the equity method to account for investments in entities that we do not control, but over which we have the ability to exercise significant influence. We generally refer to these entities as “joint ventures.” We have eliminated all intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform to the presentation at December 31, 2014 and for the year ended December 31, 2014. We present the notes to our consolidated financial statements on the basis of continuing operations, unless otherwise stated. |
Unless the context otherwise indicates, “we,” “us” and “our” mean B&W and its consolidated subsidiaries. |
Reportable Segments |
We operate in five reportable segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Our reportable segments are further described as follows: |
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| • | | Our Power Generation segment provides advanced fossil and renewable power generation equipment that includes a broad suite of boiler products and environmental systems and related services for power and industrial uses. We specialize in engineering, manufacturing, procurement, and erection of equipment and technologies used in the power generation industry and various other industries, and the provision of related services, including steam generating equipment, proven emissions control systems for environmental regulations, renewable energy solutions (biomass, combined heat and power, waste-to-energy and concentrating solar power), boiler cleaning systems, material transport equipment, fuel handling systems, cogeneration and combined cycle installations, and carbon capture and sequestration technologies. For this full range of product offerings, we offer complete aftermarket, operation and maintenance and construction project services. We provide products and services to electric utilities, municipalities, EPC contractors, architect engineers, independent power producers, international trading firms, electric power cooperatives and state electricity boards. Our markets include electric power generation, industrial, chemical, oil refinery, cement, institutional, municipal and government customers worldwide. We have an extensive North American and global footprint including engineering, design, service, manufacturing, sales, business development, regional service centers, manufacturers’ representatives and joint venture facilities located in more than 30 countries around the globe. Our installed base represents more than 300,000 MW of equivalent steam-generating capacity in more than 800 facilities in over 90 countries. | | | | | | | | | | | | | | | | | |
Our steam generating equipment operates on a range of traditional fossil fuels including coal, natural gas and oil along with renewable, unconventional and other typical waste fuel streams. We have commercialized many advanced emissions technologies to control nitrogen oxide, sulfur dioxide, sulfur trioxide, coarse and fine particulate matter, mercury, acid gases and other hazardous air emissions. |
On June 20, 2014, we completed the acquisition of MEGTEC Holdings, Inc. (“MEGTEC”). MEGTEC designs, engineers, manufactures and services air pollution control systems and coating/drying equipment for a variety of industrial applications and complements our environmental products and solutions offerings. |
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| • | | Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy (“DOE”)/National Nuclear Security Administration’s (“NNSA”) Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Through this segment, we own and operate manufacturing facilities located in Lynchburg, Virginia; Mount Vernon, Indiana; Euclid, Ohio; Barberton, Ohio; and Erwin, Tennessee. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components. These two locations are N-Stamp certified by the American Society of Mechanical Engineers (“ASME”), making them two of only a few North American suppliers of large, heavy-walled nuclear components and vessels. The Euclid facility, which is also ASME N-Stamp certified, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. (“NFS”), one of our wholly owned subsidiaries. Located in Erwin, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel. | | | | | | | | | | | | | | | | | |
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| • | | Our Technical Services segment provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities. These services are provided to the Department of Defense and the DOE, including the NNSA, the Office of Nuclear Energy, the Office of Science, and the Office of Environmental Management. Through this segment we deliver products and management solutions to nuclear operations and high-consequence manufacturing facilities. A significant portion of this segment’s operations are conducted through joint ventures. | | | | | | | | | | | | | | | | | |
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| • | | Our Nuclear Energy segment supplies commercial nuclear steam generators and components to nuclear utility customers. B&W has supplied the nuclear industry with more than 1,300 large, heavy components worldwide. This segment is the only heavy nuclear component, N-Stamp certified manufacturer in North America. Our Nuclear Energy segment fabricates pressure vessels, reactors, steam generators, heat exchangers and other auxiliary equipment. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development and metallurgy and materials engineering. In addition, this segment offers services for nuclear steam generators and balance of plant equipment, as well as nondestructive examination and tooling/repair solutions for other plant systems and components. This segment also offers engineering and licensing services for new nuclear plant designs. | | | | | | | | | | | | | | | | | |
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| • | | Our mPower segment is designing the B&W mPower™ reactor, a small modular reactor (“SMR”) design generally based on proven light-water nuclear technology. Through our majority-owned joint venture, Generation mPower LLC (“GmP”), we are developing the associated mPower Plant power generating facility, which will use two B&W mPower™ reactors to generate greater than 360 MW within an advanced passively safe and secure plant architecture. As part of this initiative, we were selected to receive funding pursuant to a Cooperative Agreement with the DOE under its Small Modular Reactor Licensing Technical Support Program (the “Funding Program”) for SMR deployment. This Funding Program provided financial assistance for our mPower Plant licensing and engineering development costs associated with SMR design certification and generic design activities. On April 14, 2014, we announced our plans to restructure the mPower program to reduce spending and focus on technology development. Beginning in the third quarter of 2014, we slowed the pace of development and intend to invest no more than $15 million on an annual basis while we continue to search for additional investors in the mPower program. We intend to continue working with the DOE to further the program. At this time, the latest extension to the Cooperative Agreement has expired and the DOE funding has been suspended. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program. | | | | | | | | | | | | | | | | | |
For financial information about our segments, see Note 16 to our consolidated financial statements included in this report. |
Spin-off |
On November 5, 2014, we announced plans to separate our Power Generation business from our Government & Nuclear Operations business, which includes the Nuclear Operations, Technical Services, Nuclear Energy and mPower segments, through a spin-off, creating a new independent, publicly traded company, Babcock & Wilcox Enterprises, Inc. (“BW”). We expect the spin-off will be effective by mid-summer 2015, subject to several customary conditions, including final approval of the transaction by our Board of Directors. Concurrent with the spin-off, the Company will change its name to BWX Technologies, Inc. (“BWXT”). We plan to effect the separation through a tax-free spin-off transaction. |
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Use of Estimates |
We use estimates and assumptions to prepare our financial statements in conformity with GAAP. Some of our more significant estimates include our estimate of costs to complete long-term construction contracts, estimates of costs to be incurred to satisfy contractual warranty requirements, estimates of the value of acquired intangible assets and estimates we make in selecting assumptions related to the valuations of our pension and postretirement plans, including the selection of our discount rates, mortality and expected rates of return on our pension plan assets. These estimates and assumptions affect the amounts we report in our financial statements and accompanying notes. Our actual results could differ from these estimates. Variances could result in a material effect on our financial condition and results of operations in future periods. |
Earnings Per Share |
We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. We have a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units and performance shares and performance units, subject to satisfaction of specific performance goals. We include the shares applicable to these plans in dilutive earnings per share when related performance criteria have been met. |
Investments |
Our investment portfolio consists primarily of highly liquid money market instruments. Additionally, we currently hold Centrus Energy Corp. bonds and equities received upon USEC Inc.’s emergence from bankruptcy. Our investments are carried at fair value and are either classified as trading, with unrealized gains and losses reported in earnings, or as available-for-sale, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income. We classify investments available for current operations in the consolidated balance sheets as current assets, while we classify investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other – net. The cost of securities sold is based on the specific identification method. We include interest on securities in interest income. |
Foreign Currency Translation |
We translate assets and liabilities of our foreign operations into U.S. dollars at current exchange rates, and we translate income statement items at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income. We report foreign currency transaction gains and losses in income. We have included in other - net transaction gains (losses) of $1.9 million, $0.5 million and $(0.6) million for the years ended December 31, 2014, 2013 and 2012, respectively. |
Contracts and Revenue Recognition |
We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress completion as a percentage of the total project. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined. |
For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical, except to assure that no loss will be incurred, as deferred profit recognition contracts. |
Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. Under the completed-contract method, income is recognized only when a contract is completed or substantially complete. |
For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed. |
Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable. In the year ended December 31, 2014, we executed a change order in our Nuclear Operations segment that increased the value of existing contracts by $70.5 million. We recognized $46.4 million of revenue for the cumulative effect of this contract change, as well as $25.8 million in cost of operations for the recognition of the associated costs being recovered. |
In the year ended December 31, 2014, we recorded a contract loss totaling approximately $11.6 million for additional estimated costs to complete our Power Generation segment’s Berlin Station project. These losses are in addition to contract losses recorded on this project of $35.6 million and $16.9 million in 2013 and 2012, respectively. We previously asserted that substantial completion had been achieved on this project in early 2014 and that any further delays to complete this project were the result of the customer’s failure to supply fuel complying with the contract specifications. The customer certified that we achieved substantial completion on the project effective July 19, 2014, following which we believe the customer has no further claims for liquidated damages associated with the delays. See Note 10 for legal proceedings associated with this matter. |
The following represent the components of our contracts in progress and advance billings on contracts included in our consolidated balance sheets: |
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| | December 31, | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | |
Included in Contracts in Progress: | | | | | | | | | | | | | | | | | | | | |
Costs incurred less costs of revenue recognized | | $ | 183,312 | | | $ | 150,724 | | | | | | | | | | | | | |
Revenues recognized less billings to customers | | | 215,061 | | | | 220,096 | | | | | | | | | | | | | |
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Contracts In Progress | | $ | 398,373 | | | $ | 370,820 | | | | | | | | | | | | | |
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Included In Advance Billings on Contracts: | | | | | | | | | | | | | | | | | | | | |
Billings to customers less revenues recognized | | $ | 274,151 | | | $ | 411,156 | | | | | | | | | | | | | |
Costs incurred less costs of revenue recognized | | | (18,616 | ) | | | (93,385 | ) | | | | | | | | | | | | |
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Advance Billings on Contracts | | $ | 255,535 | | | $ | 317,771 | | | | | | | | | | | | | |
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The following amounts represent retainages on contracts: |
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| | December 31, | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | |
Retainages expected to be collected within one year | | $ | 103,867 | | | $ | 84,389 | | | | | | | | | | | | | |
Retainages expected to be collected after one year | | | 9,092 | | | | 12,820 | | | | | | | | | | | | | |
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Total retainages | | $ | 112,959 | | | $ | 97,209 | | | | | | | | | | | | | |
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We have included retainages expected to be collected in 2015 in accounts receivable – trade, net. Retainages expected to be collected after one year are included in other assets. Of the long-term retainages at December 31, 2014, we anticipate collecting $1.8 million in 2016, $5.9 million in 2017 and $1.4 million in 2018. |
Comprehensive Income |
The components of accumulated other comprehensive income included in stockholders’ equity are as follows: |
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| | December 31, | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | |
Currency translation adjustments | | $ | 11,547 | | | $ | 38,415 | | | | | | | | | | | | | |
Net unrealized gain on available-for-sale investments | | | 155 | | | | 130 | | | | | | | | | | | | | |
Net unrealized gain (loss) on derivative financial instruments | | | (123 | ) | | | 627 | | | | | | | | | | | | | |
Unrecognized prior service cost on benefit obligations | | | (7,983 | ) | | | (10,824 | ) | | | | | | | | | | | | |
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Accumulated other comprehensive income | | $ | 3,596 | | | $ | 28,348 | | | | | | | | | | | | | |
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The amounts reclassified out of accumulated other comprehensive income by component and the affected consolidated statements of income line items are as follows: |
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| | Year ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
Accumulated Other Comprehensive Income | | (In thousands) | | | Line Item Presented | | | | | | |
Component Recognized | | | | | | |
Realized (loss) gain on derivative financial instruments | | $ | 620 | | | $ | (1,885 | ) | | $ | (1,082 | ) | | Revenues | | | | | | |
| | | (2,793 | ) | | | (2,174 | ) | | | 3,833 | | | Cost of operations | | | | | | |
| | | 4 | | | | 144 | | | | (24 | ) | | Other-net | | | | | | |
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| | | (2,169 | ) | | | (3,915 | ) | | | 2,727 | | | Total before tax | | | | | | |
| | | 559 | | | | 973 | | | | (704 | ) | | Provision for Income Taxes | | | | | | |
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| | $ | (1,610 | ) | | $ | (2,942 | ) | | $ | 2,023 | | | Net Income | | | | | | |
Amortization of prior service cost on benefit obligations | | $ | (3,433 | ) | | $ | (2,813 | ) | | $ | (3,271 | ) | | Cost of operations | | | | | | |
| | | (1,795 | ) | | | (197 | ) | | | (169 | ) | | Selling, general and administrative expenses | | | | | | |
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| | | (5,228 | ) | | | (3,010 | ) | | | (3,440 | ) | | Total before tax | | | | | | |
| | | 1,547 | | | | 1,035 | | | | 1,159 | | | Provision for Income Taxes | | | | | | |
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| | $ | (3,681 | ) | | $ | (1,975 | ) | | $ | (2,281 | ) | | Net Income | | | | | | |
Realized gains on investments | | $ | 172 | | | $ | 799 | | | $ | 35 | | | Other-net | | | | | | |
| | | (61 | ) | | | (30 | ) | | | — | | | Provision for Income Taxes | | | | | | |
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| | $ | 111 | | | $ | 769 | | | $ | 35 | | | Net Income | | | | | | |
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Total reclassification for the period | | $ | (5,180 | ) | | $ | (4,148 | ) | | $ | (223 | ) | | | | | | | | |
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Warranty Expense |
We accrue estimated expense included in cost of operations on our consolidated statements of income to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. |
The following summarizes the changes in the carrying amount of accrued warranty expense: |
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| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
| | (In thousands) | | | | | | | | | |
Balance at beginning of period | | $ | 56,436 | | | $ | 83,682 | | | $ | 97,209 | | | | | | | | | |
Additions | | | 14,993 | | | | 18,486 | | | | 20,972 | | | | | | | | | |
Acquisition of MEGTEC | | | 4,693 | | | | — | | | | — | | | | | | | | | |
Expirations and other changes | | | (6,393 | ) | | | (24,801 | ) | | | (24,766 | ) | | | | | | | | |
Payments | | | (14,807 | ) | | | (20,250 | ) | | | (10,217 | ) | | | | | | | | |
Translation and other | | | (1,298 | ) | | | (681 | ) | | | 484 | | | | | | | | | |
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Balance at end of period | | $ | 53,624 | | | $ | 56,436 | | | $ | 83,682 | | | | | | | | | |
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Asset Retirement Obligations and Environmental Clean-up Costs |
We accrue for future decommissioning of our nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility’s life, which is a requirement of our licenses from the NRC. In accordance with the FASB Topic Asset Retirement and Environmental Obligations, we record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When we initially record such a liability, we capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of a liability, we will settle the obligation for its recorded amount or incur a gain or loss. This topic applies to environmental liabilities associated with assets that we currently operate and are obligated to remove from service. For environmental liabilities associated with assets that we no longer operate, we have accrued amounts based on the estimated costs of clean-up activities for which we are responsible, net of any cost-sharing arrangements. We adjust the estimated costs as further information develops or circumstances change. An exception to this accounting treatment relates to the work we perform for two facilities for which the U.S. Government is obligated to pay substantially all of the decommissioning costs. |
Substantially all of our asset retirement obligations relate to the remediation of our nuclear analytical laboratory and the NFS facility in our Nuclear Operations segment. The following table reflects our asset retirement obligations: |
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| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
| | (In thousands) | | | | | | | | | |
Balance at beginning of period | | $ | 44,771 | | | $ | 42,366 | | | $ | 35,885 | | | | | | | | | |
Costs incurred | | | — | | | | — | | | | — | | | | | | | | | |
Additions/Adjustments | | | 418 | | | | (109 | ) | | | 3,422 | | | | | | | | | |
Accretion | | | 2,622 | | | | 2,514 | | | | 3,059 | | | | | | | | | |
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Balance at end of period | | $ | 47,811 | | | $ | 44,771 | | | $ | 42,366 | | | | | | | | | |
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Research and Development |
Our research and development activities are related to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge the costs of research and development unrelated to specific contracts as incurred. Substantially all of these costs are in our Power Generation and mPower segments, the majority of which are related to the development of our B&W mPower™ reactor and the associated mPower Plant. Contractual arrangements for customer-sponsored research and development can vary on a case-by-case basis and include contracts, cooperative agreements and grants. Research and development activities totaled $142.8 million, $200.8 million and $173.9 million in the years ended December 31, 2014, 2013 and 2012, respectively. This includes amounts paid for by our customers of $41.8 million, $43.2 million and $53.4 million, in the years ended December 31, 2014, 2013 and 2012, respectively, and DOE funds provided under the Funding Program of $27.8 million and $78.4 million in the years ended December 31, 2014 and 2013, respectively. Amounts provided under the Funding Program in the year ended December 31, 2013 include $21.5 million of pre-award cost reimbursement, $9.7 million of which related to research and development costs incurred in the year ended December 31, 2012. |
During the years ended December 31, 2014, 2013 and 2012, we recognized $5.8 million, $15.8 million and $17.9 million, respectively, of non-cash in-kind research and development costs (included above) related to services contributed by our minority partner to GmP, our majority-owned subsidiary formed in 2011 to oversee the program to develop the small modular nuclear power plant based on B&W mPower™ technology. |
Pension Plans and Postretirement Benefits |
We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S. and international subsidiaries. We utilize actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations utilize significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. The expected rate of return on plan assets assumption is based on capital market assumptions of the long-term expected returns for the investment mix of assets currently in the portfolio. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the classes within the total asset portfolio. Expected health care cost trends represent expected annual rates of change in the cost of health care benefits and are estimated based on analysis of health care cost inflation. For the year ended December 31, 2014, we adjusted the mortality assumption for our domestic plans to reflect mortality improvements identified by the Society of Actuaries, adjusted for the Company’s experience. |
The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year, or as interim remeasurements are required, we immediately recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost. Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets. |
We recognize the funded status of each plan as either an asset or a liability in the consolidated balance sheets. The funded status is the difference between the fair value of plan assets and the present value of its benefit obligation, determined on a plan-by-plan basis. Our pension plan assets can include assets that are difficult to value. See Note 7 for a detailed description of our plan assets. |
Income Taxes |
Income tax expense for federal, foreign, state and local income taxes are calculated on pre-tax income based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess deferred taxes and the adequacy of the valuation allowance on a quarterly basis. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of provision for income taxes on our consolidated statements of income. |
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Inventories |
We carry our inventories at the lower of cost or market. We determine cost principally on the first-in, first-out basis, except for certain materials inventories of our Power Generation segment, for which we use the last-in, first-out (“LIFO”) method. We determined the cost of approximately 17% and 18% of our total inventories using the LIFO method at December 31, 2014 and 2013, respectively, and our total LIFO reserve at December 31, 2014 and 2013 was approximately $7.9 million and $7.7 million, respectively. Inventories are summarized below: |
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| | December 31, | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | |
Raw Materials and Supplies | | $ | 81,530 | | | $ | 85,455 | | | | | | | | | | | | | |
Work in Progress | | | 9,831 | | | | 10,872 | | | | | | | | | | | | | |
Finished Goods | | | 17,276 | | | | 16,731 | | | | | | | | | | | | | |
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Total Inventories | | $ | 108,637 | | | $ | 113,058 | | | | | | | | | | | | | |
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Property, Plant and Equipment |
We carry our property, plant and equipment at depreciated cost, less any impairment provisions. We depreciate our property, plant and equipment using the straight-line method over estimated economic useful lives of eight to 33 years for buildings and three to 28 years for machinery and equipment. Our depreciation expense was $92.9 million, $62.2 million and $59.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. We expense the costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset as we incur them. |
Property, plant and equipment is stated at cost and is set forth below: |
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| | December 31, | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | |
Land | | $ | 15,506 | | | $ | 11,718 | | | | | | | | | | | | | |
Buildings | | | 253,338 | | | | 249,614 | | | | | | | | | | | | | |
Machinery and equipment | | | 827,029 | | | | 782,633 | | | | | | | | | | | | | |
Property under construction | | | 71,708 | | | | 82,718 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | 1,167,581 | | | | 1,126,683 | | | | | | | | | | | | | |
Less accumulated depreciation | | | 730,946 | | | | 679,604 | | | | | | | | | | | | | |
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Net Property, Plant and Equipment | | $ | 436,635 | | | $ | 447,079 | | | | | | | | | | | | | |
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Investments in Unconsolidated Affiliates |
We use the equity method of accounting for affiliates in which we are able to exert significant influence. Currently, substantially all of our material investments in affiliates that are not consolidated are recorded using the equity method. Affiliates in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost. |
Goodwill |
Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually. We may elect to perform a qualitative test when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we utilize a two-step quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. |
The following summarizes the changes in the carrying amount of goodwill: |
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| | Power | | | Nuclear | | | Technical | | | Nuclear | | | Total | |
Generation | Operations | Services | Energy |
| | (In thousands) | |
Balance at December 31, 2012 | | $ | 103,702 | | | $ | 118,103 | | | $ | 45,000 | | | $ | 13,975 | | | $ | 280,780 | |
Currency translation adjustments and other | | | 928 | | | | — | | | | — | | | | — | | | | 928 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 | | $ | 104,630 | | | $ | 118,103 | | | $ | 45,000 | | | $ | 13,975 | | | $ | 281,708 | |
Purchase price adjustment for acquisition of MEGTEC (Note 2) | | | 108,800 | | | | — | | | | — | | | | — | | | | 108,800 | |
Currency translation adjustments and other(1) | | | (4,152 | ) | | | (7,164 | ) | | | — | | | | — | | | | (11,316 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2014 | | $ | 209,278 | | | $ | 110,939 | | | $ | 45,000 | | | $ | 13,975 | | | $ | 379,192 | |
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-1 | Includes adjustments resulting from acquisitions occurring prior to December 31, 2012 of $(7.2) million and changes from foreign currency translation adjustments of $(4.2) million and $0.9 million for the years ended December 31, 2013 and 2012, respectively. | | | | | | | | | | | | | | | | | | | |
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Intangible Assets |
Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to annual impairment testing. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by quantitatively determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we recognize impairment for the amount of the difference. Our intangible assets are as follows: |
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| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
| | (In thousands) | | | | | | | | | |
Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
Gross cost: | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 57,539 | | | $ | 35,383 | | | $ | 36,644 | | | | | | | | | |
Acquired backlog | | | 10,600 | | | | — | | | | 2,979 | | | | | | | | | |
Tradename | | | 11,457 | | | | 11,945 | | | | 11,945 | | | | | | | | | |
Unpatented technology | | | 8,472 | | | | 6,422 | | | | 6,422 | | | | | | | | | |
Patented technology | | | 2,521 | | | | 2,521 | | | | 6,961 | | | | | | | | | |
All other | | | 9,765 | | | | 9,755 | | | | 7,912 | | | | | | | | | |
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Total | | $ | 100,354 | | | $ | 66,026 | | | $ | 72,863 | | | | | | | | | |
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Accumulated amortization: | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | (17,011 | ) | | $ | (13,490 | ) | | $ | (11,173 | ) | | | | | | | | |
Acquired backlog | | | (5,300 | ) | | | — | | | | (1,457 | ) | | | | | | | | |
Tradename | | | (2,959 | ) | | | (8,015 | ) | | | (6,422 | ) | | | | | | | | |
Unpatented technology | | | (3,442 | ) | | | (3,335 | ) | | | (2,682 | ) | | | | | | | | |
Patented technology | | | (1,122 | ) | | | (806 | ) | | | (4,235 | ) | | | | | | | | |
All other | | | (4,782 | ) | | | (3,994 | ) | | | (4,343 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | (34,616 | ) | | $ | (29,640 | ) | | $ | (30,312 | ) | | | | | | | | |
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Net amortized intangible assets | | $ | 65,738 | | | $ | 36,386 | | | $ | 42,551 | | | | | | | | | |
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Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
NRC category 1 license | | $ | 43,830 | | | $ | 43,830 | | | $ | 43,830 | | | | | | | | | |
Trademarks and trade names | | | 1,305 | | | | 1,305 | | | | 1,305 | | | | | | | | | |
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Total unamortized intangible assets | | $ | 45,135 | | | $ | 45,135 | | | $ | 45,135 | | | | | | | | | |
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The following summarizes the changes in the carrying amount of intangible assets: |
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| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
| | (In thousands) | | | | | | | | | |
Balance at beginning of period | | $ | 81,521 | | | $ | 87,686 | | | $ | 103,041 | | | | | | | | | |
Business acquisitions and adjustments | | | 44,972 | | | | 2,200 | | | | (1,746 | ) | | | | | | | | |
Amortization expense | | | (12,923 | ) | | | (8,324 | ) | | | (11,010 | ) | | | | | | | | |
Impairment charge | | | (1,730 | ) | | | (1,260 | ) | | | (3,216 | ) | | | | | | | | |
Currency translation adjustments and other | | | (967 | ) | | | 1,219 | | | | 617 | | | | | | | | | |
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Balance at end of period | | $ | 110,873 | | | $ | 81,521 | | | $ | 87,686 | | | | | | | | | |
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We recognized impairment charges totaling $1.7 million and $1.3 million in the years ended December 31, 2014 and 2013, respectively, related to the cancellation of operations and maintenance services contracts and the sale of a subsidiary in our Power Generation segment. |
Estimated amortization expense for the next five fiscal years is as follows (in thousands): |
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Year Ending December 31, | | Amount | | | | | | | | | | | | | | | | | |
2015 | | $ | 13,360 | | | | | | | | | | | | | | | | | |
2016 | | $ | 8,006 | | | | | | | | | | | | | | | | | |
2017 | | $ | 7,912 | | | | | | | | | | | | | | | | | |
2018 | | $ | 7,262 | | | | | | | | | | | | | | | | | |
2019 | | $ | 6,908 | | | | | | | | | | | | | | | | | |
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Other Non-Current Assets |
We have included deferred debt issuance costs in other assets. We amortize deferred debt issuance costs as interest expense over the life of the related debt. The following summarizes the changes in the carrying amount of these assets: |
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| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | | | | | | | | | |
| | (In thousands) | | | | | | | | | |
Balance at beginning of period | | $ | 6,518 | | | $ | 8,468 | | | $ | 5,723 | | | | | | | | | |
Additions | | | 5,473 | | | | — | | | | 4,902 | | | | | | | | | |
Interest expense – debt issuance costs | | | (2,070 | ) | | | (1,950 | ) | | | (2,157 | ) | | | | | | | | |
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Balance at end of period | | $ | 9,921 | | | $ | 6,518 | | | $ | 8,468 | | | | | | | | | |
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Capitalization of Interest Cost |
We capitalize interest in accordance with FASB Topic Interest. We incurred total interest of $9.5 million, $4.8 million and $4.9 million in the years ended December 31, 2014, 2013 and 2012, respectively, of which we capitalized $1.9 million, $1.7 million and $1.2 million in the years ended December 31, 2014, 2013 and 2012, respectively. |
Cash and Cash Equivalents and Restricted Cash |
Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them. |
We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes. At December 31, 2014, we had restricted cash and cash equivalents totaling $57.2 million, $3.7 million of which was held in restricted foreign cash accounts, $2.7 million of which was held for future decommissioning of facilities (which is included in other assets on our consolidated balance sheets), and $50.8 million of which was held to meet reinsurance reserve requirements of our captive insurer. |
Derivative Financial Instruments |
Our global operations give rise to exposure to market risks from changes in foreign currency exchange (“FX”) rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities’ functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes. |
We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our consolidated balance sheets and defer the related gains and losses in stockholders’ equity as a component of accumulated other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness is immediately recognized in other – net on our consolidated statements of income. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of other – net in our consolidated statements of income. |
Self-Insurance |
We have a wholly owned insurance subsidiary that provides employer’s liability, general and automotive liability and workers’ compensation insurance and, from time to time, builder’s risk insurance (within certain limits) to our companies. We may also, in the future, have this insurance subsidiary accept other risks that we cannot or do not wish to transfer to outside insurance companies. Included in other liabilities on our consolidated balance sheets are reserves for self-insurance totaling $32.8 million and $37.8 million at December 31, 2014 and 2013, respectively. The reduction in 2014 was primarily attributable to a change in estimate based on historical loss experience recognized in cost of operations in our consolidated statements of income. |
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Loss Contingencies |
We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation, as discussed in Note 10. Our losses are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties; the attribution of damages, if any, among multiple defendants; plaintiffs, in most cases involving personal injury claims, do not specify the amount of damages claimed; the discovery process may take multiple years to complete; during the litigation process, it is common to have multiple complex unresolved procedural and substantive issues; the potential availability of insurance and indemnity coverages; the wide-ranging outcomes reached in similar cases, including the variety of damages awarded; the likelihood of settlements for de minimus amounts prior to trial; the likelihood of success at trial; and the likelihood of success on appeal. Consequently, it is possible future earnings could be affected by changes in our assessments of the probability that a loss has been incurred in a material pending litigation against us and/or changes in our estimates related to such matters. |
Stock-Based Compensation |
We expense stock-based compensation in accordance with FASB Topic Compensation – Stock Compensation. Under this topic, the fair value of equity-classified awards, such as restricted stock, performance shares and stock options, is determined on the date of grant and is not remeasured. The fair value of liability-classified awards, such as cash-settled stock appreciation rights, restricted stock units and performance units, is determined on the date of grant and is remeasured at the end of each reporting period through the date of settlement. Grant date fair values for restricted stock, restricted stock units, performance shares and performance units are determined using the closing price of our common stock on the date of grant. Grant date fair values for stock options and stock appreciation rights are determined using a Black-Scholes option-pricing model (“Black-Scholes”). For performance shares or units granted in the year ended December 31, 2014 that contain a Relative Total Shareholder Return vesting criteria, we utilize a Monte Carlo simulation to determine the grant date fair value, which determines the probability of satisfying the market condition included in the award. The determination of the fair value of a share-based payment award using an option-pricing model requires the input of significant assumptions, such as the expected life of the award and stock price volatility. |
Under the provisions of this FASB topic, we recognize expense, net of an estimated forfeiture rate, for all share-based awards granted on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. This topic requires compensation expense to be recognized, net of an estimate for forfeitures, such that compensation expense is recorded only for those awards expected to vest. We review the estimate for forfeitures periodically and record any adjustments deemed necessary for each reporting period. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. |
Additionally, this FASB topic amended FASB Topic Statement of Cash Flows, to require excess tax benefits to be reported as a financing cash flow, rather than as a reduction of taxes paid. These excess tax benefits result from tax deductions in excess of the cumulative compensation expense recognized for options exercised and other equity-classified awards. |
See Note 9 for a further discussion of stock-based compensation. |
Recently Adopted Accounting Standards |
In February 2013, the FASB issued an update to the Topic Liabilities. This update requires an entity to recognize obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. On January 1, 2014, we adopted this update. The adoption of these provisions did not have an impact on our financial statements. |
In July 2013, the FASB issued an update to the Topic Income Taxes. This update relates to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. On January 1, 2014, we adopted this update. The adoption of these provisions did not have an impact on our financial statements. |
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In April 2014, the FASB issued an update to the Topics Presentation of Financial Statements and Property, Plant and Equipment. This update changes the criteria for reporting discontinued operations such that a disposal of a component of an entity will be required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We early adopted this pronouncement in the second quarter of 2014. The disposal of our Nuclear Projects business in the second quarter of 2014 did not qualify as a discontinued operation under the new guidance due to its relative insignificance to B&W’s operations and financial results. See Note 2 for additional information related to this disposal. |
New Accounting Standards |
In May 2014, the FASB issued Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in the Topic Revenue Recognition and most industry specific guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This update is effective in 2017 and early adoption is not permitted. The update may be adopted either retrospectively to each prior period or as a cumulative-effect adjustment on the date of adoption. We are currently evaluating the impact of the adoption of this standard on our financial statements. |
In August 2014, the FASB issued an update to the Topic Presentation of Financial Statements. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. If there is substantial doubt about an entity’s ability to continue as a going concern, certain disclosures are required. This update will be effective for us in 2017. We do not expect the adoption of this update to have a material impact on our financial statements. |