| Basis of Presentation and Significant Accounting Policies | NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Babcock & Wilcox Enterprises, Inc. (“BW”,
“we”, “us” or “our”) operates
in three business segments as described below and was wholly owned
by The Babcock & Wilcox Company (“BWC” or the
“former Parent”) until June 30, 2015 when BWC
distributed 100% of our outstanding common stock to the BWC
shareholders through a tax-free spin-off transaction (the
“spin-off”). BWC is now known as BWX Technologies, Inc.
On and prior to June 30, 2015, our financial position,
operating results and cash flows consisted of The Power Generation
Operations of BWC (“BW PGG”), which represented a
combined reporting entity comprised of the assets and liabilities
in managing and operating the Power Generation segment of BWC,
combined with related captive insurance operations that were
contributed by BWC to BW. In addition, BW PGG also includes certain
assets and liabilities of BWC’s Nuclear Energy
(“NE”) segment that were transferred to BWC. We have
treated the assets and liabilities and results of operations of NE
as a discontinued operation in our condensed consolidated and
combined financial statements. See Note 3 for further
information.
Our condensed consolidated and combined balance sheet as of
June 30, 2015 consists of the consolidated balances of BW,
while our condensed consolidated and combined balance sheet as of
December 31, 2014 consists of the combined results of BW PGG.
Our condensed consolidated and combined statements of operations
and our condensed consolidated and combined cash flows consist
entirely of the combined results of BW PGG.
On June 8, 2015, BWC’s Board of Directors approved the
spin-off of BW through the distribution of shares of BW common
stock to holders of BWC common stock. The distribution of BW common
stock was made on June 30, 2015 and consisted of one share of
BW common stock for every two shares of BWC common stock to holders
of BWC common stock as of 5:00 p.m. New York City time on the
record date, June 18, 2015. Cash was paid in lieu of any
fractional shares of BW common stock. On June 30, 2015, BW
became a separate publicly-traded company, and BWC did not retain
any ownership interest in BW. A registration statement on Form 10
describing the spin-off was filed by BW with the Securities and
Exchange Commission and was declared effective on June 16,
2015 (as amended through the time of such effectiveness, the
“Form 10”).
We have presented our condensed consolidated and combined financial
statements in U.S. Dollars in accordance with the interim reporting
requirements of Rule 10-01 of Regulation S-X and
accounting principles generally accepted in the United States
(“GAAP”). Certain financial information and disclosures
normally included in our financial statements prepared annually
have been condensed or omitted. Readers of these financial
statements should, therefore, refer to the consolidated financial
statements and notes in our Form 10. We have included all
adjustments, in the opinion of management, consisting only of
normal recurring adjustments, necessary for a fair presentation. 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 present the notes to our condensed
consolidated and combined financial statements on the basis of
continuing operations, unless otherwise stated.
Certain corporate and general and administrative expenses,
including those related to executive management, tax, accounting,
legal, information technology, treasury services, and certain
employee benefits, have been allocated by BWC to us to reflect all
costs of doing business related to these operations in the
financial statements, including expenses incurred by related
entities on our behalf. The majority of these allocations of
management and support services costs are based on specific
identification methods such as direct usage and level of effort.
The remainder is allocated on the basis of a three-factor formula
that considered proportional revenue generated, payroll and fixed
assets. Management believes such allocations are reasonable.
However, the associated expenses reflected in the accompanying
condensed consolidated and combined statements of operations may
not be indicative of the actual expenses that would have been
incurred had we been operating as an independent public company for
the periods presented. Following the separation and distribution
from BWC, we have been performing these functions using internal
resources or purchased services, certain of which may be provided
by BWC during a transitional period pursuant to a transition
services agreement. Refer to Note 13 for a detailed description of
transactions with other affiliates of BWC.
We have reclassified amounts previously reported to conform to the
presentation as of and for the three and six month periods ended
June 30, 2015 and 2014, attributable to the treatment of NE as
a discontinued operation. We have also retrospectively adjusted
amounts previously reported in the December 31, 2014 combined
balance sheet related to the initial capitalization of our new,
wholly-owned captive insurance subsidiary, which occurred in the
second quarter of 2014. The retrospective adjustment reduced
restricted cash, investments and other assets by $5.5 million, $0.5
million and $0.3 million, respectively.
Reporting Segments
We operate in three reportable segments: Global Power, Global
Services and Industrial Environmental. Our reportable segments are
further described as follows:
• Our Global Power segment represents
our worldwide new build boiler and environmental products
operations. Through this segment, we engineer, manufacture,
procure, construct and commission steam generating and
environmental systems and other related equipment. Our boilers are
designed for utility and industrial applications, fired with fossil
and renewable fuels and include advanced supercritical boilers,
subcritical boilers, fluidized bed boilers, biomass-fired boilers,
waste-to-energy boilers, chemical recovery boilers, industrial
power boilers, package boilers, heat recovery steam generators,
waste heat boilers and solar thermal power systems. Our
environmental systems offer air pollution control systems and
related equipment for the treatment of nitrogen oxides, sulfur
dioxide, fine particulate, mercury, acid gases and other hazardous
air emissions and include wet and dry flue gas desulfurization
systems, catalytic and non-catalytic nitrogen oxides reduction
systems, low nitrogen oxides burners and overfire air systems,
fabric filter baghouses, wet and dry electrostatic precipitators,
mercury control systems and dry sorbent injection for acid gas
mitigation. Our customers consist of a wide range of utilities,
independent power producers and industrial companies globally.
• Our Global Services segment provides
a comprehensive mix of aftermarket products and services to support
peak efficiency and availability of steam generating and associated
environmental and auxiliary equipment for power generation. Our
products and services include replacement parts, field technical
services, retrofit and upgrade projects, fuel switching and
repowering projects, construction and maintenance services,
start-up and commissioning, training programs and plant operations
and maintenance for our full complement of boiler, environmental
and auxiliary equipment. We deliver these aftermarket products and
services to a large installed base for our and our
competitors’ power generation and industrial plants globally
through our extensive network of regionally located service
centers, technical support personnel, and global sourcing
capabilities. Our customers consist of a wide range of utilities,
independent power producers and industrial companies globally.
• Our Industrial Environmental segment
provides environmental products and services to numerous industrial
end markets through Babcock & Wilcox MEGTEC Holdings, Inc.
(“MEGTEC”), which we acquired on June 20, 2014.
Through this segment, we design, engineer and manufacture products
including oxidizers, solvent and distillation systems, wet and dry
electrostatic precipitators, fabric filter baghouses, scrubbers and
heat recovery systems. The segment also provides specialized
industrial process systems, coating lines and equipment. Our suite
of technologies for pollution abatement include systems that
control volatile organic compounds and air toxins, particulate,
nitrogen oxides and acid gas air emissions from industrial
processes. We serve a diverse set of industrial end markets with a
current emphasis on the chemical, pharmaceutical, energy storage,
packaging and automotive markets.
See Note 11 for further information regarding our segments.
Operating results for the three and six months ended June 30,
2015 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2015. For further
information, refer to the combined financial statements and the
related footnotes included in the Form 10.
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. At June 30, 2015 and
December 31, 2014, we recognized accrued claims totaling $10.1
million and $8.2 million, respectively.
In the three and six months ended June 30, 2014, we recorded a
contract loss totaling approximately $4.0 million and $11.6
million, respectively, based on our estimated costs to complete our
Global Power segment’s Berlin Station project. 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 this project
effective July 19, 2014, following which the customer has no
further claims for liquidated damages associated with delays. See
Note 7 for legal proceedings associated with this matter.
Comprehensive Income
The components of accumulated other comprehensive income included
in stockholders’ equity are as follows:
June 30,
December 31,
2015 2014
(In
thousands)
Currency translation adjustments $ (8,781 ) $ 11,551
Net unrealized gain on investments (10 ) (22 )
Net unrealized gain on derivative financial instruments (327 ) (123 )
Unrecognized prior service cost on benefit obligations (1,289 ) (1,032 )
Accumulated other comprehensive income (loss) $ (10,407 ) $ 10,374
The amounts reclassified out of accumulated other comprehensive
income by component and the affected condensed consolidated and
combined statements of operations line items are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2015 2014 2015 2014
Accumulated Other Comprehensive Income
Component Recognized (In
thousands)
Line Item Presented
Realized (losses) gains on derivative financial instruments $ (40 ) $ 13 $ 22 $ 23 Revenues
(2 ) (5 ) 98 (5 ) Cost of operations
(33 )
— (32 )
— Other-net
(75 ) 8 88 18 Total before tax
23 (2 ) (5 ) (4 ) Provision for Income Taxes
(52 ) 6 83 14 Net Income
Amortization of prior service cost on benefit obligations (100 ) (125 ) (200 ) (250 ) Cost of operations
37 50 80 100 Provision for Income Taxes
(63 ) (75 ) (120 ) (150 ) Net Income
Realized gain on investments (2 )
— (3 ) 15 Other-net
1
— 1 (5 ) Provision for Income Taxes
(1 )
— (2 ) 10 Net Income
Total reclassifications for the period $ (116 ) $ (69 ) $ (39 ) $ (126 )
Inventories
The components of inventories are as follows:
June 30,
December 31,
2015 2014
(In
thousands)
Raw materials and supplies $ 69,680 $ 71,604
Work in progress 8,381 9,831
Finished goods 19,052 17,276
Total inventories $ 97,113 $ 98,711
Restricted Cash and Cash Equivalents
At June 30, 2015, we had restricted cash and cash equivalents
totaling $35.5 million, $4.1 million of which was held in
restricted foreign cash accounts and $31.4 million of which was
held to meet reinsurance reserve requirements of our captive
insurer in lieu of long-term investments.
Goodwill
The following summarizes the changes in the carrying amount of
goodwill:
Global Power Global Services Industrial Total
(In
thousands)
Balance at December 31, 2014 $ 37,991 $ 62,486 $ 108,800 $ 209,277
Final purchase price allocation for MEGTEC
—
— (4,492 ) (4,492 )
Foreign currency translation adjustments and other (902 ) (1,485 )
— (2,387 )
Balance at June 30, 2015 $ 37,089 $ 61,001 $ 104,308 $ 202,398
Warranty Expense
We accrue estimated expense included in cost of operations on our
condensed consolidated and combined statements of operations 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 our
accrued warranty expense:
Six Months Ended June 30,
2015 2014
(In
thousands)
Balance at beginning of period $ 37,735 $ 38,968
Additions 8,432 4,774
Acquisition of MEGTEC
— 4,692
Expirations and other changes (202 ) (2,234 )
Payments (8,535 ) (4,549 )
Translation and other (435 )
—
Balance at end of period $ 36,995 $ 41,651
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 research and
development costs unrelated to specific contracts as they are
incurred. Research and development activities totaled $4.0 million
and $4.3 million in the three months ended June 30, 2015 and
2014, respectively, and $8.5 million and $8.3 million in the six
months ended June 30, 2015 and 2014, respectively.
In the three months ended June 30, 2015, we recognized a $9.0
million impairment charge primarily related to research and
development facilities and equipment dedicated to a carbon capture
process that was determined during the quarter ended June 30,
2015 to not be commercially viable. The impairment is included in
losses on asset disposals and impairments, net.
Provision for Income Taxes
We are subject to U.S. federal income tax and income tax of
multiple state and international jurisdictions. We provide for
income taxes based on the enacted tax laws and rates in the
jurisdictions in which we conduct our operations. These
jurisdictions may have regimes of taxation that vary with respect
to nominal rates and with respect to the basis on which these rates
are applied. This variation, along with changes in our mix of
income within these jurisdictions, can contribute to changes in our
effective tax rate from period to period. We classify interest and
penalties related to taxes (net of any applicable tax benefit) as a
component of provision for income taxes on our condensed
consolidated and combined statements of operations.
Our effective tax rate for the three months ended June 30,
2015 was approximately 18.2% as compared to 53.3% for the three
months ended June 30, 2014. Our effective tax rate for the
three months ended June 30, 2015 was lower than our statutory
rate primarily due to the jurisdictional mix of our income. Our
effective tax rate for the three months ended June 30, 2014
was higher than our statutory rate primarily due to the
jurisdictional mix of income as well as the favorable impact of an
increase in benefits for amended federal manufacturing deductions
and certain amended state return filings, offset by an increase to
a valuation allowance against certain state deferred tax
assets.
Our effective tax rate for the six months ended June 30, 2015
was approximately 29.9% as compared to 8.6% for the six months
ended June 30, 2014. Our effective tax rate for the six months
ended June 30, 2015 was lower than our statutory rate
primarily due to the jurisdictional mix of our income. Our
effective tax rate for the six months ended June 30, 2014 was
lower than our statutory rate primarily due to the receipt of a
favorable ruling from the Internal Revenue Service that allowed us
to amend prior year U.S. income tax returns to exclude
distributions of certain of our foreign joint ventures from
domestic taxable income.
As of June 30, 2015, we have gross unrecognized tax benefits
of $2.4 million, which, if recognized, would lower our effective
tax rate from continuing operations.
New Accounting Standards
In April 2015, the FASB issued Accounting Standards Update
(“ASU”) No. 2015-03, Simplifying the Presentation
of Debt Issuance Costs. This ASU requires that debt issuance costs
related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt
liability, consistent with debt discounts. This revised guidance is
effective retrospectively for annual reporting periods beginning
after December 15, 2015, and related interim periods with
early adoption permitted. We are currently evaluating the impact of
this standard.
In April 2015, the FASB issued ASU 2015-05 –
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Fees Paid in a Cloud
Computing Arrangement. The objective of this ASU is to help
entities evaluate the accounting for fees paid by a customer in a
cloud computing arrangement by providing guidance as to whether an
arrangement includes the sale or license of software. This update
is effective prospectively for annual periods, including interim
periods within those annual periods, beginning after
December 15, 2015 with early adoption permitted. We are
currently evaluating the impact of this standard.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value
Measurement (Topic 820): Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent). This ASU permits a reporting entity to measure the
fair value of certain investments using the net asset value per
share of the investment. This update is effective retrospectively
for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. We are currently
evaluating the impact of this standard. |
