Note 2 - Accounting Policies (Policies) | 9 Months Ended |
Sep. 30, 2014 |
Accounting Policies [Abstract] | ' |
Income Tax, Policy [Policy Text Block] | ' |
Taxation |
The Company provides for estimated income taxes payable or refundable on current year income tax returns as well as the estimated future tax effects attributable to temporary differences and carryforwards, based upon enacted tax laws and tax rates, and in accordance with FASB ASC 740, Income Taxes (“FASB ASC 740”). FASB ASC 740 also requires that a valuation allowance be recorded against any deferred tax assets that are not likely to be realized in the future. Refer to Note 7 for additional information regarding taxes on income. |
Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block] | ' |
Long-Lived Assets |
Property, plant and equipment and other identified intangibles (primarily customer relationships, patents and acquired technologies, trademarks, licenses, contract backlog and non-compete agreements) are recorded at cost and, except for goodwill and certain trademarks, are depreciated or amortized on a straight-line basis over their estimated useful lives. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy can result in the actual useful lives differing from the Company’s estimates. If the Company determines that the useful life of its property, plant and equipment or its identified intangible assets should be changed, the Company would depreciate or amortize the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing or decreasing depreciation or amortization expense. |
Long-lived assets, including property, plant and equipment and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. The estimate of cash flow is based upon, among other things, assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. |
On October 6, 2014, the Company’s board of directors approved the 2014 Restructuring Plan as discussed further in Note 12. As part of the 2014 Restructuring Plan, the Company evaluated the long-lived assets of its global operations affected by the restructuring initiative. In the early stages of the evaluation process, the Company reviewed the financial performance of all at risk asset groups within each affected reporting unit. Due to the ongoing weak economic conditions and weak economic outlook for certain at risk asset groups, the Company decided to no longer focus on the possible growth opportunities within these businesses; therefore, the Company would no longer provide cash flow or operational support to these businesses. This decision was deemed a significant adverse change in the extent or manner in which the asset is currently being used, and as such, the Company performed an asset impairment review as of September 30, 2014 for all of its at risk asset groups within each of the affected reporting units in accordance with ASC 360 Property, Plant and Equipment (“FASB ASC 360”). |
The affected asset groups include: (i) the Bayou and Bayou Delta asset groups within the Bayou reporting unit (“Bayou Reporting Unit”); (ii) the France and Switzerland asset groups within the European Sewer and Water Rehabilitation (“Europe”) reporting unit; and (iii) the Singapore, Hong Kong, Malaysia and India asset groups within the Asia-Pacific Sewer and Water Rehabilitation (“Asia-Pacific”) reporting unit. The results of the Bayou Reporting Unit and its related asset groups are reported within the Energy and Mining reportable segment. The results of Europe and Asia-Pacific and their related asset groups are reported within the Water and Wastewater reportable segment. |
The assets of each asset group represent the lowest level for which identifiable cash flows can be determined independent of other groups of assets and liabilities. The Company developed internal forward business plans under the guidance of local and regional leadership to determine the undiscounted expected future cash flows derived from each of the at risk asset groups’ long-lived assets. Such were based on management’s best estimates considering the likelihood of various outcomes. Based on the internal projections, the Company determined that the undiscounted expected future cash flows for all of the at risk asset groups referenced above were less than the carrying value of the assets, and as a result, engaged a third-party valuation firm to assist in determining the fair value of long-lived assets at these at risk asset groups. |
In order to determine the impairment amount of long-lived assets, the Company first determined the fair value of each key component of its long-lived assets at each asset group. For property and equipment, the Company primarily utilized the cost and market approaches, which involved the use of significant estimates and assumptions such as salvage and scrap market data and producer price indices. The Company also considered functional and economic obsolescence related to the business and the assets. Based upon the results of the analysis, the at risk asset groups with a fair value less than the carrying value of their respective assets included Bayou, Bayou Delta, France, Malaysia and India. Accordingly, the Company recorded a total impairment charge of $11.9 million in the quarter and nine months ended September 30, 2014, which consisted of $10.9 million related to Bayou, $0.4 million related to Bayou Delta, $0.2 million related to France, $0.3 million related to Malaysia and $0.1 million related to India. The impairment charge was primarily recorded to cost of revenues in the Consolidated Statements of Operations. |
Included within the impairment assessment were Bayou-related intangible assets such as tradenames and customer relationships that were also tested on an undiscounted cash flow basis. For customer relationships, the undiscounted expected future cash flows were less than the carrying value; thus, the Company engaged a third-party valuation firm to assist in determining the fair value of customer relationships recorded at Bayou. In order to determine the impairment amount of the customer relationships intangible asset, the Company calculated the fair value of the intangible based on the multi-period excess earnings method, which utilizes discounted cash flows to evaluate the net earnings attributable to the asset being measured. Key assumptions used in assessment include the discount rate (based on weighted-average cost of capital), revenue growth rates, contributory asset charges and working capital needs, which were based on current market conditions and were consistent with internal management projections. |
Based on the results of the valuation, the carrying amount of the customer relationship intangible asset at Bayou exceeded the fair value and resulted in a full impairment as of September 30, 2014. Accordingly, the Company recorded a $10.9 million impairment charge for the quarter and nine months ended September 30, 2014. The impairment charge was recorded to definite-lived intangible asset impairment in the Consolidated Statements of Operations. |
The fair value estimates described above were determined using observable inputs and significant unobservable inputs, which are based on level 3 inputs as defined in Note 11. |
Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block] | ' |
Goodwill |
Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired. Under FASB ASC 350, Intangibles – Goodwill and Other (“FASB ASC 350”), the Company assesses recoverability of goodwill on an annual basis or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The annual assessment was last completed as of October 1, 2013. See Note 4 for additional information regarding goodwill by operating segment. Factors that could potentially trigger an interim impairment review include (but are not limited to): |
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• | significant underperformance of a reporting unit relative to expected, historical or forecasted future operating results; | | | | | | |
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• | significant negative industry or economic trends; | | | | | | |
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• | significant changes in the strategy for a reporting unit including extended slowdowns in a segment’s market; | | | | | | |
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• | a decrease in the Company’s market capitalization below its book value; and | | | | | | |
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• | a significant change in regulations. | | | | | | |
As a result of the 2014 Restructuring Plan, the Company evaluated the goodwill of its global operations affected by the restructuring initiative and determined that a triggering event had occurred. As such, the Company performed a goodwill impairment review for each affected reporting unit as of September 30, 2014. The Company’s reporting units adversely affected by the 2014 Restructuring Plan were Bayou, Europe and Asia-Pacific. In accordance with the provisions of FASB ASC 350, the Company determined the fair value of its reporting units and compared such fair value to the carrying value of those reporting units. For all three reporting units, fair value exceeded carrying value. |
Fair value of reporting units is determined using a combination of two valuation methods: a market approach and an income approach with each method given equal weight in determining the fair value assigned to each reporting unit. Absent an indication of fair value from a potential buyer or similar specific transaction, the Company believes the use of these two methods provides a reasonable estimate of a reporting unit’s fair value. Assumptions common to both methods are operating plans and economic outlooks, which are used to forecast future revenues, earnings and after-tax cash flows for each reporting unit. These assumptions are applied consistently for both methods. |
The market approach estimates fair value by first determining earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples for comparable publicly-traded companies with similar characteristics of the reporting unit. The EBITDA multiples for comparable companies are based upon current enterprise value. The enterprise value is based upon current market capitalization and includes a control premium. Management believes this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to the Company’s reporting units. |
The income approach is based on forecasted future (debt-free) cash flows that are discounted to present value using factors that consider timing and risk of future cash flows. Management believes this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. Discounted cash flow projections are based on financial forecasts developed from operating plans and economic outlooks, growth rates, estimates of future expected changes in operating margins, terminal value growth rates, future capital expenditures and changes in working capital requirements. Estimates of discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to business models, changes in the Company’s weighted average cost of capital, or changes in operating performance. |
The discount rate applied to the estimated future cash flows is one of the most significant assumptions utilized under the income approach. Management determines the appropriate discount rate for each of the Company’s reporting units based on the weighted average cost of capital (“WACC”) for each individual reporting unit. The WACC takes into account both the pre-tax cost of debt and cost of equity (a major component of the cost of equity is the current risk-free rate on twenty year U.S. Treasury bonds). As each reporting unit has a different risk profile based on the nature of its operations, including market-based factors, the WACC for each reporting unit may differ. Accordingly, the WACCs were adjusted, as appropriate, to account for company-specific risks associated with each reporting unit. |
Other significant assumptions used in the Company’s goodwill review included: (i) annual revenue growth rates generally ranging from 2% to 7%; (ii) sustained or slightly increased gross margins; (iii) peer group EBITDA multiples; and (iv) terminal values for each reporting unit using a long-term growth rate of 2.5% to 3.0%. If actual results differ from estimates used in these calculations, we could incur future impairment charges. |
For the Bayou Reporting Unit, the excess of fair value in relation to its carrying value was 10.2%. The values derived from both the income approach and market approach decreased from the October 1, 2013 analysis; however, the fair value in relation to its carrying value improved from the prior year due to a decrease in carrying value as of the valuation dates. During the first nine months of 2014, the carrying value at the Bayou Reporting Unit was lowered due to the sale of its interest in Bayou Coating as described in Note 1 and the impairment of tangible and intangibles assets described above. The fair value for the Bayou Reporting Unit decreased $48.0 million, or 30.9%, from the prior year analysis due to the suspension of a material contract, a lack of project activity available in the Gulf of Mexico market and customer-driven project delays. The impairment analysis assumed a weighted average cost of capital of 13.5% and a long-term growth rate of 3%. The analysis also included an annual revenue growth rate of approximately 5%; modestly higher than the prior year actual results, but at a level that is below our five-year average. Projected cash flows anticipate a modest recovery in the Gulf of Mexico market beginning in 2015. The Company noted improved visibility into larger bidding opportunities for deep water drilling activities in the Gulf of Mexico; however, there is a significant lead time from drilling to the point of building the pipeline infrastructure, or gather lines, to bring oil and natural gas onshore for refinement. This extended lead time creates added uncertainty and could have a material negative impact on long-term projected cash flows. Additionally, projected cash flows related to the Bayou Reporting Unit’s new insulation facility located in Louisiana are subject to final operational testing and largely dependent, in 2015 and 2016, on a single, large customer with a long-standing history with the Company. The Bayou Reporting Unit’s Canadian coating operation, while not as reliant on larger projects, is dependent upon overall increased project activity in order to realize the cash flow projections included in the impairment analysis. If any of these assumptions do not materialize in a manner consistent with the Company’s expectations, there is risk of impairment to recorded goodwill. |
For Europe, the excess of fair value in relation to its carrying value was 9.3%. The values derived from both the income approach and market approach decreased from the October 1, 2013 analysis, and the fair value in relation to its carrying value declined from the prior year due to exiting certain European operations. The fair value for Europe decreased $8.2 million, or 9.5%, from the prior year analysis. The impairment analysis assumed a weighted average cost of capital of 14.0% and a long-term growth rate of 2.5%. The analysis also included an annual revenue growth rate of approximately 5%; slightly below the prior year results, and certain cost savings expected to be achieved through the 2014 Restructuring Plan. In addition, projected cash flows were also based, in part, on the successful closure of the Insituform contacting operations in France and Switzerland. If any of these assumptions do not materialize in a manner consistent with the Company’s expectations, there is risk of impairment to recorded goodwill. |
For Asia-Pacific, the excess of fair value in relation to its carrying value was 12.1%. The values derived from both the income approach and market approach decreased from the October 1, 2013 analysis, and the fair value in relation to its carrying value declined from the prior year due to exiting certain Asia-Pacific operations, many of which, however, were underperforming. The fair value for Asia-Pacific decreased $18.0 million, or 36.4%, from the prior year analysis. The impairment analysis assumed a weighted average cost of capital of 14.0% and a long-term growth rate of 3.0%. The analysis also included an annual revenue growth rate of approximately 5% for the remaining operations and certain cost savings expected to be achieved through the 2014 Restructuring Plan. In addition, projected cash flows were also based, in part, on the successful closure of the Insituform contracting operations in India, Hong Kong, Malaysia and Singapore. If any of these assumptions do not materialize in a manner consistent with the Company’s expectations, there is risk of impairment to recorded goodwill. |
The total value of goodwill recorded at September 30, 2014 for the Bayou, Europe and Asia-Pacific reporting units was $29.7 million, $20.4 million and $5.3 million, respectively. The Company will perform its annual goodwill assessment for all of its reporting units as of October 1, 2014. |
Revenues | ' |
Revenues |
Revenues include construction, engineering and installation revenues that are recognized using the percentage-of-completion method of accounting in the ratio of costs incurred to estimated final costs. Revenues from change orders, extra work and variations in the scope of work are recognized when it is probable that they will result in additional contract revenue and when the amount can be reliably estimated. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and equipment costs. The Company expenses all pre-contract costs in the period these costs are incurred. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of these contracts, recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. If material, the effects of any changes in estimates are disclosed in the notes to the consolidated financial statements. When estimates indicate that a loss will be incurred on a contract, a provision for the expected loss is recorded in the period in which the loss becomes evident. Any revenue recognized is only to the extent costs have been recognized in the period. Additionally, the Company expenses all costs for unpriced change orders in the period in which they are incurred. |
Revenues from Brinderson are derived mainly from multiple maintenance contracts under multi-year, long-term Master Service Agreements and alliance contracts, as well as, engineering and construction-type contracts. Brinderson enters into contracts with its customers that contain three principal types of pricing provisions: time and materials, cost plus fixed fee and fixed price. Although the terms of these contracts vary, most are made pursuant to cost reimbursable contracts on a time and materials basis under which revenues are recorded based on costs incurred at agreed upon contractual rates. Brinderson also performs services on a cost plus fixed fee basis under which revenues are recorded based upon costs incurred at agreed upon rates and a proportionate amount of the fixed fee or percentage stipulated in the contract. |
Foreign Currency Transaction | ' |
Foreign Currency Translation |
For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss) in total stockholders’ equity. Net foreign exchange transaction gains (losses) are included in other income (expense) in the Consolidated Statements of Operations. Due to the strengthening of the U.S. Dollar, there was a substantial decrease with respect to certain functional currencies and their relation to the U.S. Dollar during the third quarter of 2014, most notably the Canadian Dollar, British Pound and Euro. |
The Company’s accumulated other comprehensive income is comprised of three main components: (i) currency translation; (ii) derivatives; and (iii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom. |
As of September 30, 2014 and 2013, the Company had accumulated income (loss) of $(13.9) million and $2.1 million, respectively, related to currency translation adjustments, $(0.1) million and $1.3 million, respectively, related to derivative transactions and $(0.2) million and $0.2 million, respectively, related to pension activity in accumulated other comprehensive income. |
Investments in Affiliated Companies | ' |
Investments in Affiliated Companies |
On March 31, 2014, the Company sold its forty-nine percent (49%) interest in Bayou Coating to Stupp, the holder of the remaining fifty-one percent (51%) interest in Bayou Coating. Stupp purchased the interest by exercising an existing option to acquire the Company’s interest in Bayou Coating at a purchase price equal to $9.1 million. The Company had previously received an indication from Stupp of its intent to exercise such option and, in the second quarter of 2013 in connection with such indication, the Company recognized a non-cash charge of $2.7 million ($1.8 million post-tax) related to the goodwill allocated to the joint venture as part of the purchase price accounting associated with the 2009 acquisition of Bayou. The non-cash charge represented the Company’s then current estimate of the difference between the carrying value of the investment on the balance sheet and the amount the Company would receive in connection with the exercise. During the first quarter of 2014, the difference between the Company’s recorded gross equity in earnings of affiliated companies of approximately $1.2 million and the final equity distribution settlement of $0.7 million resulted in a loss of approximately $0.5 million that is recorded in other income (expense) on the consolidated statement of operations. |
Prior to March 2014, the Company held a fifty-nine (59%) equity interest in Bayou Delta through which the Company offers pipe jointing and other services for the steel-coated pipe industry. The remaining forty-one percent (41%) was held by Bayou Coating. On March 31, 2014, the Company acquired this forty-one percent (41%) interest from Bayou Coating by exercising its existing option at a purchase price equal to $0.6 million. As a result, Bayou Delta is now a wholly owned subsidiary of the Company. |
In June 2013, the Company sold its fifty percent (50%) interest in Insituform-Germany to Aarsleff. Insituform-Germany, a company that was jointly owned by Aegion and Aarsleff, is active in the business of no-dig pipe rehabilitation in Germany, Slovakia and Hungary. The sale price was €14.0 million, approximately $18.3 million. The sale resulted in a gain on the sale of approximately $11.3 million (net of $0.5 million of transaction expenses). In connection with the sale, Insituform-Germany also entered into a tube supply agreement with the Company whereby Insituform-Germany will purchase on an annual basis at least GBP 2.3 million, approximately $3.6 million, of felt cured-in-place pipe (“CIPP”) liners during the two-year period from June 26, 2013 to June 30, 2015. |
Investments in entities in which the Company does not have control or is not the primary beneficiary of a variable interest entity, and for which the Company has 20% to 50% ownership or has the ability to exert significant influence, are accounted for by the equity method. At December 31, 2013, the investment in affiliated companies on the Company’s consolidated balance sheets was $9.1 million. Due to the sale of Bayou Coating, the balance was zero at September 30, 2014. |
Net income presented below for the quarters ended September 30, 2014 and 2013 includes Bayou Coating’s previously held forty-one percent (41%) interest in Bayou Delta, which is eliminated for purposes of determining the Company’s equity in earnings of affiliated companies because Bayou Delta is consolidated in the Company’s financial statements as a result of its additional ownership through another Company subsidiary. |
The Company’s equity in earnings of affiliated companies for all periods presented below includes acquisition-related depreciation and amortization expense and is net of income taxes associated with these earnings. Financial data for these investments in affiliated companies for each of the nine month periods ended September 30, 2014 and 2013 is summarized in the following table (in thousands): |
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| Nine Months Ended September 30, |
Income statement data | 2014 | | 2013 (1) |
Revenue | $ | 9,088 | | | $ | 75,986 | |
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Gross profit | 3,489 | | | 21,753 | |
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Net income | 2,413 | | | 13,624 | |
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Equity in earnings of affiliated companies | 677 | | | 3,903 | |
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(1) Includes the financial data of Insituform-Germany through its sale in June 2013. |
Investments in Variable Interest Entities | ' |
Investments in Variable Interest Entities |
The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation. |
The Company’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps: |
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• | determine whether the entity meets the criteria to qualify as a VIE; and | | | | | | |
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• | determine whether the Company is the primary beneficiary of the VIE. | | | | | | |
In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include: |
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• | the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders; | | | | | | |
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• | the nature of the Company’s involvement with the entity; | | | | | | |
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• | whether control of the entity may be achieved through arrangements that do not involve voting equity; | | | | | | |
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• | whether there is sufficient equity investment at risk to finance the activities of the entity; and | | | | | | |
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• | whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns. | | | | | | |
If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments: |
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• | whether the entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and | | | | | | |
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• | whether the entity has the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. | | | | | | |
Newly Issued Accounting Pronouncements | ' |
Newly Issued Accounting Pronouncements |
In April 2014, the FASB issued guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is 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 and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date and is effective for annual and interim periods beginning after December 15, 2014, with earlier adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on its financial statements. |
In May 2014, the FASB issued guidance that supersedes revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of nonfinancial assets. Under the new guidance, entities are required to recognize revenue in order 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 or services. The guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. This new guidance is effective retroactively in fiscal years beginning after December 15, 2016. The Company is currently evaluating the effect the guidance will have on its financial condition and results of operations. |