Babcock & Wilcox Enterprises, Inc. - Annual Report: 2016 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-36876
BABCOCK & WILCOX ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 47-2783641 | |
(State or other Jurisdiction of Incorporation or | (I.R.S. Employer | |
Organization) | Identification No.) | |
THE HARRIS BUILDING | ||
13024 BALLANTYNE CORPORATE PLACE, SUITE 700 | ||
CHARLOTTE, NORTH CAROLINA | 28277 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant's Telephone Number, Including Area Code: (704) 625-4900
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Name of each Exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on the last business
day of the registrant's most recently completed second fiscal quarter (based on the closing sales price on the New York Stock
Exchange on June 30, 2016) was approximately $737 million.
The number of shares of the registrant's common stock outstanding at February 20, 2017 was 48,698,385.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2017 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
BABCOCK & WILCOX ENTERPRISES, INC.
INDEX TO FORM 10-K
PAGE | ||
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PART I
Item 1. Business
In this annual report on Form 10-K, unless the context otherwise indicates, "B&W," "we," "us," the "Company" and "our" mean Babcock & Wilcox Enterprises, Inc. and its consolidated and combined subsidiaries.
B&W is a leading technology-based provider of advanced fossil and renewable power generation and environmental equipment that includes a broad suite of boiler products, environmental systems, and services for power and industrial uses. We specialize in technology and engineering for power generation and various other industries, the related procurement, erection and specialty manufacturing of equipment, and the provision of related services, including:
• | high-pressure equipment for energy conversion, such as boilers fueled by coal, oil, bitumen, natural gas, and renewables including municipal solid waste and biomass fuels; |
• | environmental control systems for both power generation and industrial applications to incinerate, filter, capture, recover and/or purify air, liquid and vapor-phase effluents from a variety of power generation and specialty manufacturing processes; |
• | aftermarket support for the global installed base of operating plants with a wide variety of products and technical services including replacement parts, retrofit and upgrade capabilities, field engineering, construction, inspection, operations and maintenance, condition assessment and other technical support; |
• | custom-engineered comprehensive dry and wet cooling solutions; |
• | gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures; and |
• | engineered-to-order services, products and systems for energy conversion worldwide and related auxiliary equipment, such as burners, pulverizers, soot blowers and ash and material handling systems. |
We operate in three reportable segments: Power, Renewable and Industrial. Through our Power segment, we provide the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. Through our Renewable segment, we supply steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. Our Industrial segment provides custom-engineered environmental solutions, industrial equipment and aftermarket parts and services through
Babcock & Wilcox MEGTEC Holdings, Inc. ("MEGTEC"), and provides custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets through SPIG S.p.A. ("SPIG"), which we acquired on July 1, 2016. See Note 5 in our consolidated and combined financial statements included in Item 8 for additional information about our segments.
Our overall activity depends significantly on the capital expenditures and operations and maintenance expenditures of global electric power generating companies, other steam-using industries and industrial facilities with environmental compliance and noise abatement needs. Several factors influence these expenditures, including:
• | prices for electricity, along with the cost of production and distribution including the cost of fuel within the United States or internationally; |
• | demand for electricity and other end products of steam-generating facilities; |
• | requirements for environmental and noise abatement improvements; |
• | expectation of future requirements to further limit or reduce greenhouse gas and other emissions in the United States and internationally; |
• | environmental policies which include waste-to-energy or biomass as options to meet legislative requirements and clean energy portfolio standards; |
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• | level of capacity utilization at operating power plants and other industrial uses of steam production; |
• | requirements for maintenance and upkeep at operating power plants to combat the accumulated effects of usage; |
• | overall strength of the industrial industry; and |
• | ability of electric power generating companies and other steam users to raise capital. |
Customer demand is heavily affected by the variations in our customers' business cycles and by the overall economies and energy, environmental and noise abatement needs of the countries in which they operate.
On June 8, 2015, the board of directors of The Babcock & Wilcox Company (now known as BWX Technologies, Inc.) ("BWC" or the "former Parent") approved the spin-off of B&W through the distribution of shares of B&W common stock to holders of BWC common stock. The distribution of B&W common stock was made on June 30, 2015, and consisted of one share of B&W 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 B&W common stock. On June 30, 2015, B&W became a separate publicly traded company, and BWC did not retain any ownership interest in B&W. We filed our Form 10 describing the spin-off with the Securities and Exchange Commission, which was declared effective on June 16, 2015. The spin-off is further described in Note 1 to the consolidated and combined financial statements included in Item 8.
Our Business Strategies
B&W is a leading technology-based provider of advanced fossil and renewable power generation equipment with a broad suite of new build boiler and environmental products. We provide a comprehensive platform of aftermarket services to a large global installed base of power generation facilities. In addition, B&W is a leading provider of technology and services in the growing market for industrial environmental and noise abatement systems. Across all of our capabilities, we specialize in engineering, specialty manufacturing, procurement and erection of equipment and technology for a large and global customer base.
Business Segments
Our assessment of operating results is based on three reportable segments, which changed during the third quarter of 2016. Our reportable segments are as follows:
Power segment
Our Power segment focuses on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. The 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, serving large steam generating utility and industrial customers globally. 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. Our auxiliary equipment includes boiler cleaning equipment and material handling equipment.
Our worldwide new build boiler and environmental products businesses serve large steam generating and industrial customers. The segment provides a full suite of product and service offerings including engineering, procurement, specialty manufacturing, construction and commissioning. The segment's boilers include utility boilers and industrial boilers fired with coal and natural gas. Our boiler products include advanced supercritical boilers, subcritical boilers, fluidized bed boilers, chemical recovery boilers, industrial power boilers, package boilers, heat recovery steam generators and waste heat boilers.
Our environmental systems offerings include air pollution control products and related equipment for the treatment of nitrogen oxides, sulfur dioxide, fine particulate, mercury, acid gases and other hazardous air emissions, including carbon dioxide capture and sequestration technologies, wet and dry flue gas desulfurization systems, catalytic and non-catalytic
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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.
The segment also receives license fees and royalty payments through licensing agreements of our proprietary technologies.
While opportunities to increase revenues in the segment are limited, we are striving to grow margins by:
• | selectively bid projects in emerging international markets needing state-of-the-art technology for fossil power generation and environmental systems; |
• | growing sales of industrial steam generation products in the petrochemical and pulp & paper markets, such as heat recovery, natural gas and oil fired package boilers, due in part to lower fuel prices; |
• | continuing our strong service presence in support of our installed fleet of steam generation equipment and expand support of other OEM equipment; and |
• | reducing costs through a focus on operational efficiencies. |
We focus our research dollars on improving our products for the markets we serve through: (i) cost reductions resulting in more competitive products in a highly competitive global market and margin improvement; (ii) reduced performance risk assuring our products meet our and our customers' expectations; and (iii) standards development and updates, which results in lower engineering hours consumed on projects and enables us to sublet engineering to low cost engineering centers of excellence.
Our Power segment generated revenues of $975.5 million, $1,235.0 million and $1,156.6 million in 2016, 2015 and 2014, respectively, which was 61.8%, 70.3% and 77.8% of our total revenues in those years, respectively.
Renewable segment
Our Renewable segment provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries, and plant operations and maintenance services for our full complement of systems and equipment. We deliver these products and services to a large base of customers primarily in Europe through our extensive network of technical support personnel and global sourcing capabilities. Our customers consist of traditional, renewable and carbon neutral power utility companies that require steam generation and environmental control technologies to enable beneficial use of municipal waste and biomass. This segment's activity is dependent on the demand for electricity and ultimately the capacity utilization and associated operations and maintenance expenditures of waste-to-energy power generating companies and other industries that use steam to generate energy.
Globally, efforts to reduce the environmental impact of burning fossil fuels may create opportunities for us as existing generating capacity is replaced with cleaner technologies. We expect growth in backlog in the second half of 2017 and beyond, primarily from renewable waste-to-energy projects, as we continue to see numerous opportunities around the globe, although the rate of backlog growth is dependent on many external factors. We have elected to limit bidding any additional Renewable contracts that involve our European resources for at least the first six months of 2017 as we work through our existing contracts.
Our Renewable segment generated revenues of $349.2 million, $338.6 million and $224.0 million in 2016, 2015 and 2014, respectively, which was 22.1%, 19.3% and 15.1% of our total revenues in those years, respectively.
Industrial segment
Through December 31, 2016, our Industrial segment was comprised of our MEGTEC and SPIG businesses. The segment is focused on custom-engineered cooling, environmental, noise abatement and industrial equipment along with related aftermarket services.
Through MEGTEC, we provide environmental products and services to numerous industrial end markets. MEGTEC designs, engineers and manufactures products including oxidizers, solvent and distillation systems, wet electrostatic precipitators, scrubbers and heat recovery systems. MEGTEC also provides specialized industrial process systems, coating lines and equipment. MEGTEC's suite of technologies for pollution abatement includes systems that control volatile organic compounds and air toxins, particulate, nitrogen oxides and acid gas air emissions from industrial processes. MEGTEC serves a diverse set of industrial end markets globally with a current emphasis on the chemical, pharmaceutical, energy storage, packaging, and automotive markets. MEGTEC's activity is dependent primarily on the capacity utilization of operating
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industrial plants and an increased emphasis on environmental emissions globally across a broad range of industries and markets.
We acquired SPIG on July 1, 2016. It provides custom-engineered cooling systems, services and aftermarket products. SPIG’s product offerings include air-cooled (dry) cooling systems, mechanical draft wet cooling towers and natural draft wet cooling hyperbolic towers. SPIG also provides end-to-end aftermarket services, including spare parts, upgrades/revamps for existing installations and remote monitoring. SPIG's comprehensive dry and wet cooling solutions and aftermarket products and services are primarily provided to the power generation industry, including natural gas-fired and renewable energy power plants, and downstream oil and gas, petrochemical and other industrial end markets in the Europe, the Middle East and the Americas. SPIG's activity is dependent primarily on global energy demand from utilities and other industrial plants, regulatory requirements, water scarcity and energy efficiency needs.
Beginning with the first quarter of 2017, Universal Acoustic & Emission Technologies, Inc. ("Universal"), which we acquired on January 11, 2017, will be added to the Industrial segment. We expect that our acquisition of Universal will complement the product and service offerings we are able to provide through our Industrial segment. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal’s product offering includes gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures. Historically, almost all of Universal's activity has been in the United States. With the integration of Universal with the Industrial segment, we expect its business will grow globally with the benefit of B&W's global network of current and future customers and the evolving needs of noise abatement controls in the industrial market.
We see opportunities for growth in revenues in the Industrial segment relating to a variety of factors. Our new equipment customers purchase equipment as part of major capacity expansions, to replace existing equipment, or in response to regulatory initiatives. Additionally, our significant installed base provides a consistent and recurring aftermarket stream of parts, retrofits and services. Major investments in global chemical markets have strengthened demand for our industrial equipment, while tightening environmental and noise abatement regulations in the United States, China, India and other developing countries are creating new opportunities. We foresee long-term trends toward increased environmental and noise abatement controls for industrial manufacturers around the world. Together, the companies that comprise the Industrial segment are well-positioned to capitalize on opportunities in these markets.
Our Industrial segment generated revenues of $253.6 million, $183.7 million and $105.4 million in 2016, 2015 and 2014, respectively, which was 16.1%, 10.4% and 7.1% of our total revenues in those years, respectively.
Acquisitions
Since our spin-off, we have pursued a strategy to acquire businesses that meet our long-term growth and diversification objectives. Our acquisition focus is primarily on companies that would complement our Industrial segment. To date, we have completed two such acquisitions, which are summarized below:
On July 1, 2016, we completed the acquisition of SPIG. Based in Arona, Italy, SPIG is a global provider of custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. See Note 4 to our consolidated and combined financial statements included in Item 8 for additional information.
On January 11, 2017, we acquired Universal for approximately $55 million in cash, funded primarily by borrowings under our United States revolving credit facility. Based in Wisconsin, Universal is a bolt-on acquisition for MEGTEC. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal’s product offering includes gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures. See Note 30 to our consolidated and combined financial statements included in Item 8 for additional information.
Joint Ventures
We participate in the ownership of a variety of entities with third parties, primarily through corporations, limited liability companies and partnerships, which we refer to as "joint ventures." We enter into joint ventures primarily for specific market access and to enhance our manufacturing, design and global production operations as well as reduce operating and financial
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risk profiles. We generally account for our investments in joint ventures under the equity method of accounting. Our unconsolidated joint ventures are described below.
• | Babcock & Wilcox Beijing Company, Ltd. ("BWBC") We own equal interests in this entity with Beijing Jingcheng Machinery Electric Holding Company, Ltd. BWBC was formed in 1986 and is located in Beijing, China. Its main activities are the design, manufacture, production and sale of various power plant and industrial boilers. BWBC expands our markets internationally and provides additional manufacturing capacity to our boiler products. |
• | Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") In June 2010, one of our subsidiaries and Thermax Ltd., a boiler manufacturer based in India, formed a joint venture to build subcritical and highly efficient supercritical boilers and pulverizers for the Indian utility boiler market. We have licensed to TBWES our technology for subcritical boilers 300 MW and larger, highly efficient supercritical boilers and coal pulverizers. In 2013, TBWES finalized construction of a facility in India designed to produce parts for up to 3,000 MW of utility boiler capacity per year. |
• | Other Project Related Ventures From time to time, we partner with other companies to better meet the needs of our customers, which can result in project-related joint venture entities. Examples of this include BWM Ottumwa Environmental Partners, where we formed a joint venture with Burns & McDonnell Engineering Company, Inc., to engineer, procure, and construct environmental control systems for the Ottumwa Generating Station, a United States based project that was substantially completed in 2014. We also formed BWL Energy Ltd. with Lagan to complete the construction of the Teesside waste wood fired boiler project in the United Kingdom. This joint venture combines our expertise in the waste-to-energy power plant design, engineering, procurement and construction with our partner's civil construction capability to provide a full turnkey product to our customer. |
• | Halley & Mellowes Pty. Ltd. ("HMA") Diamond Power International, Inc., one of our wholly owned subsidiaries, owned an interest in this Australian company, which was formed in 1984. HMA manufactures, sells and services a wide range of capital plant equipment to a diverse range of industries including the mining, processing, materials handling, water management, power generation, and oil and gas industries. On December 22, 2016, we sold all of our joint venture interest in HMA for $18.0 million, resulting in a gain of $8.3 million. |
Contracts
We execute our contracts through a variety of methods, including fixed-price, cost-plus, target price cost incentive, cost-reimbursable or some combination of these methods. Contracts are usually awarded through a competitive bid process. Factors that customers may consider include price, technical capabilities of equipment and personnel, plant or equipment availability, efficiency, safety record and reputation.
Fixed-price contracts are for a fixed amount to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us because they require us to predetermine both the quantities of work to be performed and the costs associated with executing the work. For further specification see "Risk Factors Related to Our Business – We are subject to risks associated with contractual pricing in our industry, including the risk that, if our actual costs exceed the costs we estimate on our fixed-price contracts, our profitability will decline, and we may suffer losses" as detailed in Item 1A of this report.
We have contracts that extend beyond one year. Most of our long-term contracts have provisions for progress payments. We attempt to cover anticipated increases in labor, material and service costs of our long-term contracts either through an estimate of such changes, which is reflected in the original price, or through risk-sharing mechanisms, such as escalation or price adjustments for items such as labor and commodity prices.
We generally recognize our contract revenues and related costs on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as the work progresses and reflect adjustments in profit proportionate to the percentage of completion in the period when we revise those estimates. To the extent that these adjustments result in a reduction or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material.
Our arrangements with customers frequently require us to provide letters of credit, bid and performance bonds or guarantees to secure bids or performance under contracts, which may involve significant amounts for contract security.
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In the event of a contract deferral or cancellation, we generally would be entitled to recover costs incurred, settlement expenses and profit on work completed prior to deferral or termination. Significant or numerous cancellations could adversely affect our business, financial condition, results of operations and cash flows.
Other sales, such as parts and certain aftermarket service activities, are not in the form of long-term contracts, and we recognize revenues as goods are delivered and work is performed.
Backlog
Backlog represents the dollar amount of revenue we expect to recognize in the future from contracts awarded and in progress. Not all of our expected revenue from a contract award is recorded in backlog for a variety of reasons, including that some projects are awarded and completed within the same fiscal period.
Backlog is not a measure defined by generally accepted accounting principles. It is possible that our methodology for determining backlog may not be comparable to methods used by other companies. Backlog may not be indicative of future operating results, and projects in our backlog may be canceled, modified or otherwise altered by customers. Additionally, because we operate globally, our backlog is also affected by changes in foreign currencies.
We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customer to payment for work performed. Accordingly, we exclude from backlog orders or arrangements that have been awarded but that we have not been authorized to begin performance.
We do not include the value of our unconsolidated joint venture contracts in backlog. See Note 7 to the consolidated and combined financial statements included in this annual report for financial information on our equity method investments.
Our backlog at December 31, 2016 and 2015 was as follows:
(in millions) | December 31, 2016 | December 31, 2015 | |||||
Power segment | $ | 615 | $ | 803 | |||
Renewable segment | 1,241 | 1,458 | |||||
Industrial segment | 216 | 67 | |||||
Total backlog | $ | 2,072 | $ | 2,328 | |||
Of the December 31, 2016 backlog, we expect to recognize approximate revenues as follows:
(in millions) | 2017 | 2018 | Thereafter | Total | |||||||||||
Power segment | $ | 369 | $ | 94 | $ | 152 | $ | 615 | |||||||
Renewable segment | 348 | 191 | 702 | 1,241 | |||||||||||
Industrial segment | 172 | 40 | 3 | 216 | |||||||||||
$ | 889 | $ | 326 | $ | 858 | $ | 2,072 | ||||||||
Foreign Operations
Our operations in Denmark provide comprehensive services to companies in the waste-to-energy and biomass energy sector of the power generation market, primarily in Europe. Our operations in Italy provide custom-engineered comprehensive dry and wet cooling solutions and aftermarket parts and services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. Our operations in Scotland provide boiler cleaning technologies and systems (such as sootblowers). Our operations in Germany provide a variety of ash and material handling solutions, from completely dry bottom ash handling to fly ash and petroleum coke processing. Our Canadian operations serve the Canadian industrial power, oil production and electric utility markets. We also have manufacturing facilities in Mexico to serve global markets.
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Our joint ventures in China and India primarily serve the power generation needs of their local domestic and other utility markets, but both joint ventures participate as manufacturing partners on certain of our foreign projects.
The functional currency of our foreign operating entities is not the United States dollar, and as a result, we are subject to exchange rate fluctuations that impact our financial position, results of operations and cash flows. For additional information on the geographic distribution of our revenues, see Note 5 to our consolidated and combined financial statements included in Item 8 of this annual report.
Customers
We provide our products and services to a diverse customer base that includes utilities and other power producers located around the world. We have no customers that individually accounted for more than 10% of our consolidated and combined revenues in the years ended December 31, 2016, 2015 or 2014.
Competition
With 150 years of experience, we have supplied highly engineered energy and environmental equipment in over 90 countries. We have a competitive advantage in our experience and technical capability to reliably convert a wide range of fuels to steam. Our strong, installed base around the globe also yields competitive advantages, although our markets are highly competitive and price sensitive. We compete with a number of domestic and foreign companies specializing in power generation, environmental, and cooling systems and services. Each segment's primary competitors are summarized as follows:
Power segment | Renewable segment | Industrial segment |
GE | CNIM Group | B&W SPIG primary competitors |
Doosan | Hitachi Zosen | Hamon, Enexio, Kelvion, Paharpur, Evapco, Sonder |
Babcock Power | Martin | B&W MEGTEC primary competitors |
Amec Foster Wheeler | Keppel Seghers | Durr, Dustex, CECO, Eisenmann |
MH Power Systems | Valmet | B&W Universal primary competitors |
Andritz | Braden, CECO, Innova, Miratech | |
Across each of our segments, we also compete with a variety of engineering and construction companies related to installation of steam generating systems and environmental control equipment; specialized industrial equipment; and other suppliers of replacement parts, repair and alteration services and other services required to retrofit and maintain existing steam generating systems. The primary bases of competition are price, technical capabilities, quality, timeliness of performance, breadth of products and services and willingness to accept project risks.
Raw Materials and Suppliers
Our operations use raw materials such as carbon and alloy steels in various forms and components and accessories for assembly, which are available from numerous sources. We generally purchase these raw materials and components as needed for individual contracts. We do not depend on a single source of supply for any significant raw materials. Although shortages of some raw materials have existed from time to time, no serious shortage exists at the present time.
Employees
At December 31, 2016, we had approximately 5,000 employees worldwide, not including 2,500 joint venture employees. Of our hourly employees, approximately 1,000 are union-affiliated, covered by ten union agreements related to active facilities in Canada, China, Denmark, Great Britain, Mexico, and United States. Most of our union agreements expire in 2017 or 2018, and we are actively negotiating new agreements. We consider our relationships with our employees and unions to be in good standing.
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Patents and Licenses
We currently hold a large number of United States and foreign patents and have patent applications pending. We have acquired patents and technology licenses and granted technology licenses to others when we have considered it advantageous for us to do so. Although in the aggregate our patents and licenses are important to us, we do not regard any single patent or license or group of related patents or licenses as critical or essential to our business as a whole. In general, we depend on our technological capabilities and the application of know-how, rather than patents and licenses, in the conduct of our various businesses.
Research and Development Activities
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. Research and development costs unrelated to specific contracts are expensed as incurred. Research and development expenses totaled $10.4 million, $16.5 million and $18.5 million in the years ended December 31, 2016, 2015 and 2014, respectively.
Permits and Licenses
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. The kinds of permits, licenses and certificates required in our operations depend upon a number of factors. We are not aware of any material noncompliance and believe our operations and certifications are currently in compliance with all relevant permits, licenses and certifications.
Environmental
We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our combined financial condition, results of operations or cash flows in any given year.
Executive Officers of Registrant
For a listing of our executive officers, see Part III, Item 10 of this annual report, which information is incorporated herein by reference.
***** Cautionary Statement Concerning Forward-Looking Information *****
This annual report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. Statements that include the words "expect," "intend," "plan," "believe," "project," "forecast," "estimate," "may," "should," "anticipate" and similar statements of a future or forward-looking nature identify forward-looking statements.
These forward-looking statements address matters that involve risks and uncertainties and include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and industry in general. There are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors, including the following: the highly competitive nature of our businesses; general economic and business conditions, including changes in interest rates and currency exchange rates; general developments in the industries in which we are
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involved; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform projects on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; changes in our effective tax rate and tax positions; our ability to maintain operational support for our information systems against service outages and data corruption, as well as protection against cyber-based network security breaches and theft of data; our ability to protect our intellectual property and renew licenses to use intellectual property of third parties; our use of the percentage-of-completion method of accounting; our ability to obtain and maintain sufficient financing to provide liquidity to meet our business objectives, surety bonds, letters of credit and similar financing; the risks associated with integrating businesses we acquire; our ability to successfully manage research and development projects and costs, including our efforts to successfully develop and commercialize new technologies and products; the operating risks normally incident to our lines of business, including professional liability, product liability, warranty and other claims against us; changes in, or our failure or inability to comply with, laws and government regulations; difficulties we may encounter in obtaining regulatory or other necessary permits or approvals; changes in, and liabilities relating to, existing or future environmental regulatory matters; our limited ability to influence and direct the operations of our joint ventures; potential violations of the Foreign Corrupt Practices Act; our ability to successfully compete with current and future competitors; the loss of key personnel and the continued availability of qualified personnel; our ability to negotiate and maintain good relationships with labor unions; changes in pension and medical expenses associated with our retirement benefit programs; social, political, competitive and economic situations in foreign countries where we do business or seek new business; the possibilities of war, other armed conflicts or terrorist attacks; and the other risks set forth under Part I, Item 1A "Risk Factors" in this annual report.
These factors are not necessarily all the factors that could affect us. We assume no obligation to revise or update any forward-looking statement included in this annual report for any reason, except as required by law.
Available Information
Our website address is www.babcock.com. We make available through the Investor Relations section of this website under "SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (the "SEC"). You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and annual reports, and other information regarding issuers that file electronically with the SEC. We have also posted on our website our: Corporate Governance Principles; Code of Business Conduct; Code of Ethics for our Chief Executive Officer and Senior Financial Officers; Board of Directors Conflicts of Interest Policies and Procedures; Management, Board Members and Independent Director Contact Information; By-laws; and charters for the Audit & Finance, Governance, Compensation and Safety & Security Committees of our Board.
Item 1A. Risk Factors
You should carefully consider each of the following risks and all of the other information contained in this annual report. Some of these risks relate principally to our spin-off from our former Parent, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. If any of these risks develop into actual events, our business, financial condition, results of operations or cash flows could be materially adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.
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Risks Relating to Our Industry and Our Business
We derive substantial revenues from electric power generating companies and other steam-using industries, with demand for our products and services depending on spending in these historically cyclical industries. Additionally, recent legislative and regulatory developments relating to clean air legislation are affecting industry plans for spending on coal-fired power plants within the United States and elsewhere.
The demand for power generation products and services depends primarily on the spending of electric power generating companies and other steam-using industries and expenditures by original equipment manufacturers. These expenditures are influenced by such factors as:
• | prices for electricity, along with the cost of production and distribution; |
• | prices for natural resources such as coal and natural gas; |
• | demand for electricity and other end products of steam-generating facilities; |
• | availability of other sources of electricity or other end products; |
• | requirements of environmental legislation and regulations, including potential requirements applicable to carbon dioxide emissions; |
• | impact of potential regional, state, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future; |
• | level of capacity utilization and associated operations and maintenance expenditures of power generating companies and other steam-using facilities; |
• | requirements for maintenance and upkeep at operating power plants and other steam-using facilities to combat the accumulated effects of wear and tear; |
• | ability of electric generating companies and other steam users to raise capital; and |
• | relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation. |
We estimate that 47%, 50% and 57% of our consolidated revenues in 2016, 2015 and 2014, respectively, was related to coal-fired power plants. A material decline in spending by electric power generating companies and other steam-using industries over a sustained period of time could materially and adversely affect the demand for our power generation products and services and, therefore, our financial condition, results of operations and cash flows. Coal-fired power plants have been scrutinized by environmental groups and government regulators over the emissions of potentially harmful pollutants. The recent economic environment and uncertainty concerning new environmental legislation or replacement rules or regulations in the United States and elsewhere has caused many of our major customers, principally electric utilities, to delay making substantial expenditures for new plants, as well as upgrades to existing power plants.
Demand for our products and services is vulnerable to economic downturns and industry conditions.
Demand for our products and services has been, and we expect that demand will continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including economic and industry conditions. These factors include, but are not limited to: the cyclical nature of the industries we serve, inflation, geopolitical issues, the availability and cost of credit, volatile oil and natural gas prices, low business and consumer confidence, high unemployment and energy conservation measures.
Unfavorable economic conditions may lead customers to delay, curtail or cancel proposed or existing projects, which may decrease the overall demand for our products and services and adversely affect our results of operations.
In addition, our customers may find it more difficult to raise capital in the future due to limitations on the availability of credit, increases in interest rates and other factors affecting the federal, municipal and corporate credit markets. Also, our customers may demand more favorable pricing terms and find it increasingly difficult to timely pay invoices for our products and services, which would impact our future cash flows and liquidity. Inflation or significant changes in interest rates could reduce the demand for our products and services. Any inability to timely collect our invoices may lead to an increase in our accounts receivable and potentially to increased write-offs of uncollectible invoices. If the economy weakens, or customer spending declines, then our backlog, revenues, net income and overall financial condition could deteriorate.
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Our backlog is subject to unexpected adjustments and cancellations and may not be a reliable indicator of future revenues or earnings.
There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Because of project cancellations or changes in project scope and schedule, we cannot predict with certainty when or if backlog will be performed. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us or poor project performance could increase the cost associated with a project. Delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate the revenues and profits that we actually realize from projects in backlog.
Reductions in our backlog due to cancellation or modification by a customer or for other reasons may adversely affect, potentially to a material extent, the revenues and earnings we actually receive from contracts included in our backlog. Many of the contracts in our backlog provide for cancellation fees in the event customers cancel projects. These cancellation fees usually provide for reimbursement of our out-of-pocket costs, revenues for work performed prior to cancellation and a varying percentage of the profits we would have realized had the contract been completed. However, we typically have no contractual right upon cancellation to the total revenues reflected in our backlog. Projects may remain in our backlog for extended periods of time. If we experience significant project terminations, suspensions or scope adjustments to contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
We are subject to risks associated with contractual pricing in our industry, including the risk that, if our actual costs exceed the costs we estimate on our fixed-price contracts, our profitability will decline, and we may suffer losses.
We are engaged in a highly competitive industry, and we have priced a number of our contracts on a fixed-price basis. Our actual costs could exceed our projections, as was the case recently with a large contract in the Renewable segment. We attempt to cover the increased costs of anticipated changes in labor, material and service costs of long-term contracts, either through estimates of cost increases, which are reflected in the original contract price, or through price escalation clauses. Despite these attempts, however, the cost and gross profit we realize on a fixed-price contract could vary materially from the estimated amounts because of supplier, contractor and subcontractor performance, changes in job conditions, variations in labor and equipment productivity and increases in the cost of labor and raw materials, particularly steel, over the term of the contract. These variations and the risks generally inherent in our industry may result in actual revenues or costs being different from those we originally estimated and may result in reduced profitability or losses on projects. Some of these risks include:
• | difficulties encountered on our large-scale projects related to the procurement of materials or due to schedule disruptions, equipment performance failures, engineering and design complexity, unforeseen site conditions, rejection clauses in customer contracts or other factors that may result in additional costs to us, reductions in revenue, claims or disputes; |
• | our inability to obtain compensation for additional work we perform or expenses we incur as a result of our customers providing deficient design or engineering information or equipment or materials; |
• | requirements to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts; and |
• | difficulties in engaging third-party subcontractors, equipment manufacturers or materials suppliers or failures by third-party subcontractors, equipment manufacturers or materials suppliers to perform could result in project delays and cause us to incur additional costs. |
We are exposed to credit risk and may incur losses as a result of such exposure.
We conduct our business by obtaining orders that generate cash flows in the form of advances, project progress payments and final balances in accordance with the underlying contractual terms. We are thus exposed to potential losses resulting contractual counterparties' failure to meet their obligations. As a result, the failure by customers to meet their payment obligations, or a mere delay in making those payments, could reduce our liquidity and increase the need to resort to other sources of financing, with possible adverse effects on our business, financial condition, results of operations and cash flows.
In addition, the deterioration of economic conditions or negative trends in the credit markets could have a negative impact on relationships with customers and our ability to collect on trade receivables, with possible adverse effects on our business, financial condition, results of operations and cash flows.
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Our use of the percentage-of-completion method of accounting could result in volatility in our results of operations.
We generally recognize revenues and profits under our long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as the work progresses and reflect adjustments proportionate to the percentage of completion in income in the period when we revise those estimates. To the extent these adjustments result in a reduction or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material. Our current estimates of our contract costs and the profitability of our long-term projects, although reasonably reliable when made, could change as a result of the uncertainties associated with these types of contracts, and if adjustments to overall contract costs are significant, the reductions or reversals of previously recorded revenue and profits could be material in future periods.
If our co-venturers fail to perform their contractual obligations on a project or if we fail to coordinate effectively with our co-venturers, we could be exposed to legal liability, loss of reputation and reduced profit on the project.
We often perform projects jointly with third parties. For example, we enter into contracting consortia and other contractual arrangements to bid for and perform jointly on large projects. Success on these joint projects depends in part on whether our co-venturers fulfill their contractual obligations satisfactorily. If any one or more of these third parties fail to perform their contractual obligations satisfactorily, we may be required to make additional investments and provide added services in order to compensate for that failure. If we are unable to adequately address any such performance issues, then our customer may exercise its right to terminate a joint project, exposing us to legal liability, loss of reputation and reduced profit.
Our collaborative arrangements also involve risks that participating parties may disagree on business decisions and strategies. These disagreements could result in delays, additional costs and risks of litigation. Our inability to successfully maintain existing collaborative relationships or enter into new collaborative arrangements could have a material adverse effect on our results of operations.
We could be subject to changes in tax rates or tax law, adoption of new regulations or changing interpretations of existing law or exposure to additional tax liabilities in excess of accrued amounts.
We are subject to income taxes in the United States and numerous foreign jurisdictions. A change in tax laws, treaties or regulations, or their interpretation, in any country in which we operate could result in a higher tax rate on our earnings, which could have a material impact on our earnings and cash flows from operations. Recent proposals to alter the U.S. corporate income tax regime with respect to foreign earnings as well as proposals to lower the U.S. corporate income tax rate, if enacted could potentially impose United States tax on our unrepatriated foreign earnings and would require us to reduce our net deferred tax assets, with a corresponding material, one-time, non-cash increase in income tax expense.
In addition, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain, and we are regularly subject to audit by tax authorities. Although we believe that our tax estimates and tax positions are reasonable, they could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate could have a material adverse effect on our profitability and liquidity.
Our business could be negatively impacted by security threats, including physical and cybersecurity threats, and other disruptions.
We face various security threats, including cyber threats, threats to the physical security of our facilities and infrastructure, and threats from terrorist acts, as well as the potential for business disruptions associated with these threats. Although we utilize a combination of tailored and industry standard security measures and technology to monitor and mitigate these threats, we cannot guarantee that these measures and technology will be sufficient to prevent security threats from materializing.
We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage and support a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We have been, and will likely continue to be, subject to cyber-based attacks and other attempts to threaten our information technology systems and the software we sell. A cyber-based attack
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could include attempts to gain unauthorized access to our proprietary information and attacks from malicious third parties using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking, fraud, trickery or other forms of deception. If any of our significant information technology systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, the services we provide to customers, the value of our investment in research and development efforts and other intellectual property, our product sales, financial condition, results of operations and stock price may be materially and adversely affected, and we could experience delays in reporting our financial results. In addition, there is a risk of business interruption, litigation risks, and reputational damage from leakage of confidential information or the software we sell being compromised. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means.
In order to address risks to our information systems, we continue to make investments in technologies and training of company personnel. From time to time we may replace and/or upgrade current financial, human resources and other information technology systems. These activities subject us to inherent costs and risks associated with replacing and updating these systems, including potential disruption of our internal control structure, substantial capital expenditures, demands on management time and other risks of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our systems implementations and upgrades may not result in productivity improvements at the levels anticipated, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations. Such disruption and any other information technology system disruptions, and our ability to mitigate those disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our financial condition, results of operations and stock price.
We rely on intellectual property law and confidentiality agreements to protect our intellectual property. We also rely on intellectual property we license from third parties. Our failure to protect our intellectual property rights, or our inability to obtain or renew licenses to use intellectual property of third parties, could adversely affect our business.
Our success depends, in part, on our ability to protect our proprietary information and other intellectual property. Our intellectual property could be stolen, challenged, invalidated, circumvented or rendered unenforceable. In addition, effective intellectual property protection may be limited or unavailable in some foreign countries where we operate.
Our failure to protect our intellectual property rights may result in the loss of valuable technologies or adversely affect our competitive business position. We rely significantly on proprietary technology, information, processes and know-how that are not subject to patent or copyright protection. We seek to protect this information through trade secret or confidentiality agreements with our employees, consultants, subcontractors or other parties, as well as through other security measures. These agreements and security measures may be inadequate to deter or prevent misappropriation of our confidential information. In the event of an infringement of our intellectual property rights, a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequate legal remedies to protect our intellectual property. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and could divert management's attention away from other aspects of our business. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
In some instances, we have augmented our technology base by licensing the proprietary intellectual property of third parties. In the future, we may not be able to obtain necessary licenses on commercially reasonable terms, which could have a material adverse effect on our operations.
Maintaining adequate bonding and letter of credit capacity is necessary for us to successfully bid on and win various contracts.
In line with industry practice, we are often required to post standby letters of credit and surety bonds to support contractual obligations to customers as well as other obligations. These letters of credit and bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. If a letter of credit or bond is required for a particular project and we are unable to obtain it due to insufficient liquidity or other reasons, we will not be able to pursue that project. We utilize bonding facilities, but, as is typically the case, the issuance of bonds under each of those facilities is at the surety's sole discretion. Moreover, due to events that affect the insurance and bonding and credit markets generally, bonding and letters of credit may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that letters of credit or bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate letters of credit and bonding and, as a result, to bid on new work could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2016, we had $351.8 million in letters of credit
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and bank guarantees and $527.9 million in surety bonds outstanding. Of these amounts, $7.5 million of financial letters of credit and $89.1 million of performance letters of credit were outstanding under the United States credit agreement.
Our amended United States credit facility could restrict our operations.
The terms of our amended United States credit agreement impose various restrictions and covenants on us that could have adverse consequences, including limiting our:
• | flexibility in planning for, or reacting to, changes in our business or economic, regulatory and industry conditions; |
• | ability to invest in joint ventures or acquire other companies; |
• | ability to sell assets; |
• | ability to pay dividends to our stockholders; |
• | ability to repurchase shares of our common stock; and |
• | ability to borrow additional funds. |
In addition, our amended United States credit facility requires us to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will continue to meet the financial ratios.
During the covenant relief period under our amended United States credit facility, we are limited to $300.0 million of borrowings under that facility.
Our ability to comply with the covenants and restrictions contained in our amended United States credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A breach of any of these covenants could result in an event of default under our amended United States credit facility, and we would not be able to access our credit facility for additional borrowings and letters of credit while any default exists. Upon the occurrence of such an event of default, all amounts outstanding under our amended United States credit facility could be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If indebtedness under our amended credit facility is accelerated, there can be no assurance that we will have sufficient assets to repay the indebtedness. The operating and financial restrictions and covenants in our amended credit facility and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Our business strategy includes acquisitions to support our growth. Acquisitions of other businesses can create risks and uncertainties. Our amended United States credit facility significantly limits our ability to make acquisitions in at least the next twelve months.
We intend to pursue growth through the acquisition of businesses or assets that we believe will enable us to strengthen our existing businesses and expand into adjacent industries and regions. We may be unable to continue this growth strategy if we cannot identify suitable businesses or assets, reach agreement on potential strategic acquisitions on acceptable terms or for other reasons. In addition, the recent amendment to our United States credit facility significantly limits our ability to make acquisitions during at least the next twelve months. If we are unable to complete acquisitions or to successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected. Moreover, we may incur asset impairment charges related to acquisitions that reduce our profitability.
Business acquisitions involve risks, including:
• | difficulties relating to the assimilation of personnel, services and systems of an acquired business and the assimilation of marketing and other operational capabilities; |
• | challenges resulting from unanticipated changes in customer relationships after the acquisition; |
• | additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and internal controls; |
• | assumption of liabilities of an acquired business, including liabilities that were unknown at the time the acquisition transaction was negotiated; |
• | diversion of management's attention from day-to-day operations; |
• | failure to realize anticipated benefits, such as cost savings and revenue enhancements; |
• | potentially substantial transaction costs associated with business combinations; and |
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• | potential impairment of goodwill or other intangible assets resulting from the overpayment for an acquisition. |
Acquisitions may be funded by the issuance of additional equity or debt financing, which may not be available on attractive terms, or at all. Our ability to secure such financing will depend in part on prevailing capital market conditions, as well as conditions in our business and operating results. Moreover, to the extent an acquisition transaction financed by non-equity consideration results in goodwill, it will reduce our tangible net worth, which might have an adverse effect on potential credit and bonding capacity.
Additionally, an acquisition may bring us into businesses we have not previously conducted and expose us to additional business risks that are different than those we have historically experienced. Any of these factors could affect our sales, financial condition, and results of operations.
Our business strategy includes development and commercialization of new technologies to support our growth, which requires significant investment and involves various risks and uncertainties. These new technologies may not achieve desired commercial or financial results.
Our future growth will depend, in part, on our ability to continue to innovate by developing and commercializing new product and service offerings. Investments in new technologies involve varying degrees of uncertainties and risk. Commercial success depends on many factors, including the levels of innovation, the development costs and the availability of capital resources to fund those costs, the levels of competition from others developing similar or other competing technologies, our ability to obtain or maintain government permits or certifications, our ability to license or purchase new technologies from third parties, the effectiveness of production, distribution and marketing efforts, and the costs to customers to deploy and provide support for the new technologies. We may not achieve significant revenues from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and, even if they are profitable, our operating margins from new products and services may not be as high as the margins we have experienced historically. In addition, new technologies may not be patentable and, as a result, we may face increased competition.
Our operations are subject to operating risks, which could expose us to potentially significant professional liability, product liability, warranty and other claims. Our insurance coverage may be inadequate to cover all of our significant risks or our insurers may deny coverage of material losses we incur, which could adversely affect our profitability and overall financial condition.
We engineer, construct and perform services in large industrial facilities where accidents or system failures can have significant consequences. Risks inherent in our operations include:
• | accidents resulting in injury or the loss of life or property; |
• | environmental or toxic tort claims, including delayed manifestation claims for personal injury or loss of life; |
• | pollution or other environmental mishaps; |
• | adverse weather conditions; |
• | mechanical failures; |
• | property losses; |
• | business interruption due to political action or other reasons; and |
• | labor stoppages. |
Any accident or failure at a site where we have provided products or services could result in significant professional liability, product liability, warranty and other claims against us, regardless of whether our products or services caused the incident. We have been, and in the future we may be, named as defendants in lawsuits asserting large claims as a result of litigation arising from events such as those listed above.
We endeavor to identify and obtain in established markets insurance agreements to cover significant risks and liabilities. Insurance against some of the risks inherent in our operations is either unavailable or available only at rates or on terms that we consider uneconomical. Also, catastrophic events customarily result in decreased coverage limits, more limited coverage, additional exclusions in coverage, increased premium costs and increased deductibles and self-insured retentions. Risks that we have frequently found difficult to cost-effectively insure against include, but are not limited to, business interruption, property losses from wind, flood and earthquake events, war and confiscation or seizure of property in some areas of the world, pollution liability, liabilities related to occupational health exposures (including asbestos), the failure, misuse or
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unavailability of our information systems, the failure of security measures designed to protect our information systems from security breaches, and liability related to risk of loss of our work in progress and customer-owned materials in our care, custody and control. Depending on competitive conditions and other factors, we endeavor to obtain contractual protection against uninsured risks from our customers. When obtained, such contractual indemnification protection may not be as broad as we desire or may not be supported by adequate insurance maintained by the customer. Such insurance or contractual indemnity protection may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful claim for which we are not insured or for which we are underinsured could have a material adverse effect on us. Additionally, disputes with insurance carriers over coverage may affect the timing of cash flows and, if litigation with the carrier becomes necessary, an outcome unfavorable to us may have a material adverse effect on our results of operations.
Our wholly owned captive insurance subsidiary provides workers' compensation, employer's liability, commercial general liability, professional liability and automotive liability insurance to support our operations. We may also have business reasons in the future to have our insurance subsidiary accept other risks which we cannot or do not wish to transfer to outside insurance companies. These risks may be considerable in any given year or cumulatively. Our insurance subsidiary has not provided significant amounts of insurance to unrelated parties. Claims as a result of our operations could adversely impact the ability of our insurance subsidiary to respond to all claims presented.
Additionally, upon the February 22, 2006 effectiveness of the settlement relating to the Chapter 11 proceedings involving several of our subsidiaries, most of our subsidiaries contributed substantial insurance rights to the asbestos personal injury trust, including rights to (1) certain pre-1979 primary and excess insurance coverages and (2) certain of our 1979-1986 excess insurance coverage. These insurance rights provided coverage for, among other things, asbestos and other personal injury claims, subject to the terms and conditions of the policies. The contribution of these insurance rights was made in exchange for the agreement on the part of the representatives of the asbestos claimants, including the representative of future claimants, to the entry of a permanent injunction, pursuant to Section 524(g) of the United States Bankruptcy Code, to channel to the asbestos trust all asbestos-related claims against our subsidiaries and former subsidiaries arising out of, resulting from or attributable to their operations, and the implementation of related releases and indemnification provisions protecting those subsidiaries and their affiliates from future liability for such claims. Although we are not aware of any significant, unresolved claims against our subsidiaries and former subsidiaries that are not subject to the channeling injunction and that relate to the periods during which such excess insurance coverage related, with the contribution of these insurance rights to the asbestos personal injury trust, it is possible that we could have underinsured or uninsured exposure for non-derivative asbestos claims or other personal injury or other claims that would have been insured under these coverages had the insurance rights not been contributed to the asbestos personal injury trust.
We are subject to government regulations that may adversely affect our future operations.
Many aspects of our operations and properties are affected by political developments and are subject to both domestic and foreign governmental regulations, including those relating to:
• | constructing and manufacturing power generation products; |
• | currency conversions and repatriation; |
• | clean air and other environmental protection legislation; |
• | taxation of foreign earnings; |
• | transactions in or with foreign countries or officials; and |
• | use of local employees and suppliers. |
In addition, a substantial portion of the demand for our products and services is from electric power generating companies and other steam-using customers. The demand for power generation products and services can be influenced by governmental legislation setting requirements for utilities related to operations, emissions and environmental impacts. The legislative process is unpredictable and includes a platform that continuously seeks to increase the restrictions on power producers. Potential legislation limiting emissions from power plants, including carbon dioxide, could affect our markets and the demand for our products and services related to power generation.
We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
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Our business and our customers' businesses are required to obtain, and to comply with, national, state and local government permits and approvals.
Our business and our customers' businesses are required to obtain, and to comply with, national, state and local government permits and approvals. Any of these permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of permits or approvals may adversely affect our operations by temporarily suspending our activities or curtailing our work and may subject us to penalties and other sanctions. Although existing licenses are routinely renewed by various regulators, renewal could be denied or jeopardized by various factors, including:
• | failure to comply with environmental and safety laws and regulations or permit conditions; |
• | local community, political or other opposition; |
• | executive action; and |
• | legislative action. |
In addition, if new environmental legislation or regulations are enacted or implemented, or existing laws or regulations are amended or are interpreted or enforced differently, we or our customers may be required to obtain additional operating permits or approvals. Our inability or our customers' inability to obtain, and to comply with, the permits and approvals required for our business could have a material adverse effect on us.
Our operations are subject to various environmental laws and legislation that may become more stringent in the future.
Our operations and properties are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and regulations, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others or for our acts that were in compliance with all applicable laws at the time such acts were performed.
We cannot predict all of the environmental requirements or circumstances that will exist in the future but anticipate that environmental control and protection standards will become increasingly stringent and costly. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or financial condition as a result of future compliance with existing environmental laws and regulations. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us, which may be material. Accordingly, we can provide no assurance that we will not incur significant environmental compliance costs in the future.
Our operations involve the handling, transportation and disposal of hazardous materials, and environmental laws and regulations and civil liability for contamination of the environment or related personal injuries may result in increases in our operating costs and capital expenditures and decreases in our earnings and cash flows.
Our operations involve the handling, transportation and disposal of hazardous materials. Failure to properly handle these materials could pose a health risk to humans or wildlife and could cause personal injury and property damage (including environmental contamination). If an accident were to occur, its severity could be significantly affected by the volume of the materials and the speed of corrective action taken by emergency response personnel, as well as other factors beyond our control, such as weather and wind conditions. Actions taken in response to an accident could result in significant costs.
Governmental requirements relating to the protection of the environment, including solid waste management, air quality, water quality and cleanup of contaminated sites, have in the past had a substantial impact on our operations. These requirements are complex and subject to frequent change. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination may require us to make material expenditures or subject us to liabilities that we currently do not
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anticipate. Such expenditures and liabilities may adversely affect our business, financial condition, results of operations and cash flows. In addition, some of our operations and the operations of predecessor owners of some of our properties have exposed us to civil claims by third parties for liability resulting from alleged contamination of the environment or personal injuries caused by releases of hazardous substances into the environment.
In our contracts, we seek to protect ourselves from liability associated with accidents, but there can be no assurance that such contractual limitations on liability will be effective in all cases or that our or our customers' insurance will cover all the liabilities we have assumed under those contracts. The costs of defending against a claim arising out of a contamination incident or precautionary evacuation, and any damages awarded as a result of such a claim, could adversely affect our results of operations and financial condition.
We maintain insurance coverage as part of our overall risk management strategy and due to requirements to maintain specific coverage in our financing agreements and in many of our contracts. These policies do not protect us against all liabilities associated with accidents or for unrelated claims. In addition, comparable insurance may not continue to be available to us in the future at acceptable prices, or at all.
We could be adversely affected by violations of the United States Foreign Corrupt Practices Act, the UK Anti-Bribery Act or other anti-bribery laws.
The United States Foreign Corrupt Practices Act (the "FCPA") generally prohibits companies and their intermediaries from making improper payments to non-United States government officials. Our training program, audit process and policies mandate compliance with the FCPA, the UK Anti-Bribery Act (the "UK Act") and other anti-bribery laws. We operate in some parts of the world that have experienced governmental corruption to some degree, and, in some circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. If we are found to be liable for violations of the FCPA, the UK Act or other anti-bribery laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others, including agents, promoters or employees of our joint ventures), we could suffer from civil and criminal penalties or other sanctions.
We conduct a portion of our operations through joint venture entities, over which we may have limited ability to influence.
We currently have equity interests in several significant joint ventures, which contributed $16.4 million, $(0.2) million and $8.7 million to equity in income (loss) of investees for the years ended December 31, 2016, 2015 and 2014, respectively, and may enter into additional joint venture arrangements in the future. Our influence over some of these entities may be limited. Even in those joint ventures over which we do exercise significant influence, we are often required to consider the interests of our joint venture partners in connection with major decisions concerning the operations of the joint ventures. In any case, differences in views among the joint venture participants may result in delayed decisions or disputes. We also cannot control the actions of our joint venture participants. We sometimes have joint and several liabilities with our joint venture partners under the applicable contracts for joint venture projects and we cannot be certain that our partners will be able to satisfy any potential liability that could arise. These factors could potentially harm the business and operations of a joint venture and, in turn, our business and operations.
Operating through joint ventures in which we are minority holders results in us having limited control over many decisions made with respect to business practices, projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls and internal control over financial reporting that we follow. As a result, internal control problems may arise with respect to the joint ventures that could adversely affect our ability to respond to requests or contractual obligations to customers or to meet the internal control requirements to which we are otherwise subject.
Our joint ventures located in countries outside of the United States are subject to various risks and uncertainties associated with emerging markets, including bribery and corruption, changes in laws, rules and regulations, fluctuations in demand, labor unrest, and the impact of regional and global business conditions generally. To the extent any of these factors has a material adverse impact on the joint venture or its future operations, our investment may become impaired. With respect to each joint venture, we, or our joint venture partner, may decide to change the strategic direction of the joint venture, which could adversely affect its sales, financial condition, and results of operations. In addition, our arrangements involving joint ventures may restrict us from gaining access to the cash flows or assets of these entities, including when we determine to exit a joint venture. In some cases, our joint ventures have governmentally imposed restrictions on their abilities to transfer funds
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to us. At December 31, 2016, our total investment in joint ventures was $98.7 million, which included $40.6 million related to a joint venture in India and $55.4 million related to a joint venture in China.
We may not be able to compete successfully against current and future competitors.
Some of our competitors or potential competitors have greater financial or other resources than we have and in some cases are government supported. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than those of our products and services. Furthermore, we operate in industries where capital investment is critical. We may not be able to obtain as much purchasing and borrowing leverage and access to capital for investment as other public companies, which may impair our ability to compete against competitors or potential competitors.
The loss of the services of one or more of our key personnel, or our failure to attract, assimilate and retain trained personnel in the future, could disrupt our operations and result in loss of revenues or profits.
Our success depends on the continued active participation of our executive officers and key operating personnel. The unexpected loss of the services of any one of these persons could adversely affect our operations.
Our operations require the services of employees having the technical training and experience necessary to obtain the proper operational results. As such, our operations depend, to a considerable extent, on the continuing availability of such personnel. If we should suffer any material loss of personnel to competitors, retirement or other reasons, or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our business, our operations could be adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. Additionally, we froze pension plan benefit accruals at the end of 2015, which could also result in incremental turnover in our workforce. If any of these events occurred for a significant period of time, our financial condition, results of operations and cash flows could be adversely impacted.
Negotiations with labor unions and possible work stoppages and other labor problems could divert management's attention and disrupt operations. In addition, new collective bargaining agreements or amendments to existing agreements could increase our labor costs and operating expenses.
A significant number of our employees are members of labor unions. If we are unable to negotiate acceptable new contracts with our unions from time to time, we could experience strikes or other work stoppages by the affected employees. If any such strikes or other work stoppages were to occur, we could experience a significant disruption of operations. In addition, negotiations with unions could divert management attention. New union contracts could result in increased operating costs, as a result of higher wages or benefit expenses, for both union and nonunion employees. If nonunion employees were to unionize, we could experience higher ongoing labor costs.
Pension and medical expenses associated with our retirement benefit plans may fluctuate significantly depending on a number of factors, and we may be required to contribute cash to meet underfunded pension obligations.
A substantial portion of our current and retired employee population is covered by pension and postretirement benefit plans, the costs and funding requirements of which depend on our various assumptions, including estimates of rates of return on benefit-related assets, discount rates for future payment obligations, rates of future cost growth, mortality assumptions and trends for future costs. Variances from these estimates could have a material adverse effect on us. Our policy to recognize these variances annually through mark to market accounting could result in volatility in our results of operations, which could be material. As of December 31, 2016, our defined benefit pension and postretirement benefit plans were underfunded by approximately $300.8 million. In addition, certain of these postretirement benefit plans were collectively bargained, and our ability to curtail or change the benefits provided may be impacted by contractual provisions set forth in the relevant union agreements and other plan documents. We also participate in various multi-employer pension plans in the United States and Canada under union and industry agreements that generally provide defined benefits to employees covered by collective bargaining agreements. Absent an applicable exemption, a contributor to a United States multi-employer plan is liable, upon termination or withdrawal from a plan, for its proportionate share of the plan's underfunded vested liability. Funding requirements for benefit obligations of these multi-employer pension plans are subject to certain regulatory requirements, and we may be required to make cash contributions which may be material to one or more of these plans to satisfy certain
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underfunded benefit obligations. See Note 18 to the consolidated and combined financial statements included in Item 8 in this annual report for additional information regarding our pension and postretirement benefit plan obligations.
Our international operations are subject to political, economic and other uncertainties not generally encountered in our domestic operations.
We derive a substantial portion of our revenues and equity in income of investees from international operations, and we intend to continue to expand our international operations and customer base as part of our growth strategy. Our revenues from sales to customers located outside of the United States represented approximately 46%, 41% and 37% of total revenues for the years ended December 31, 2016, 2015 and 2014, respectively. Operating in international markets requires significant resources and management attention and subjects us to political, economic and regulatory risks that are not generally encountered in our United States operations. These include:
• | risks of war, terrorism and civil unrest; |
• | expropriation, confiscation or nationalization of our assets; |
• | renegotiation or nullification of our existing contracts; |
• | changing political conditions and changing laws and policies affecting trade and investment; |
• | overlap of different tax structures; and |
• | risk of changes in foreign currency exchange rates. |
Various foreign jurisdictions have laws limiting the right and ability of foreign subsidiaries and joint ventures to pay dividends and remit earnings to affiliated companies. Our international operations sometimes face the additional risks of fluctuating currency values, hard currency shortages and controls of foreign currency exchange. If we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. These and other factors may have a material impact on our international operations or our business as a whole.
Natural disasters or other events beyond our control could adversely impact our business.
Natural disasters, such as earthquakes, tsunamis, hurricanes, floods, tornadoes, or other events could adversely impact demand for or supply of our products. In addition, natural disasters could also cause disruption to our facilities, systems or projects, which could interrupt operational processes and performance on our contracts and adversely impact our ability to manufacture our products and provide services and support to our customers. We operate facilities in areas of the world that are exposed to natural disasters, such as, but not limited to, hurricanes, floods and tornadoes.
War, other armed conflicts or terrorist attacks could have a material adverse effect on our business.
War, terrorist attacks and unrest have caused and may continue to cause instability in the world's financial and commercial markets and have significantly increased political and economic instability in some of the geographic areas in which we operate. Threats of war or other armed conflict may cause further disruption to financial and commercial markets. In addition, continued unrest could lead to acts of terrorism in the United States or elsewhere, and acts of terrorism could be directed against companies such as ours. Also, acts of terrorism and threats of armed conflicts in or around various areas in which we operate could limit or disrupt our markets and operations, including disruptions from evacuation of personnel, cancellation of contracts or the loss of personnel or assets. Armed conflicts, terrorism and their effects on us or our markets may significantly affect our business and results of operations in the future.
Regulations related to "conflict minerals" may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), the SEC adopted new requirements for companies that use minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. Under these requirements, companies that are subject to the rules conduct due diligence and disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of components incorporated in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the diligence procedures that
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we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that the components of our products either may not originate from the Democratic Republic of Congo and adjoining countries or must be certified as conflict free.
Risks Relating to our 2015 Spin-Off from our Former Parent
We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from BWC.
As an independent public company, we believe that we are able to more effectively focus on our operations and growth strategies than we could as a segment of BWC prior to the spin-off. However, following our separation from BWC in the spin-off, there is a risk that our results of operations and cash flows may be susceptible to greater volatility due to fluctuations in our business levels and other factors that may adversely affect our operating and financial performance. In addition, as a segment of BWC, we previously benefitted from BWC's financial resources. Because BWC's other operations will no longer be available to offset any volatility in our results of operations and cash flows and BWC's financial and other resources will no longer be available to us, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent public company.
Our historical audited consolidated and combined financial information is not necessarily indicative of our future financial condition, future results of operations or future cash flows nor does it reflect what our financial condition, results of operations or cash flows would have been as an independent public company during the periods presented.
The historical audited consolidated and combined financial information included in this annual report for periods prior to July 1, 2015 does not necessarily reflect what our financial condition, results of operations or cash flows would have been as an independent public company during such periods and is not necessarily indicative of our future financial condition, future results of operations or future cash flows. This is primarily a result of the following factors:
• | the historical audited consolidated and combined financial results reflect allocations of expenses for services historically provided by BWC, and those allocations may be different than the comparable expenses we would have incurred as an independent company; |
• | our cost of debt and other capitalization may be different from that reflected in our historical audited consolidated and combined financial statements; |
• | the historical audited consolidated and combined financial information does not reflect the changes that will occur in our cost structure, management, financing arrangements and business operations as a result of our separation from BWC, including the costs related to being an independent company; and |
• | the historical audited consolidated and combined financial information does not reflect the effects of some of the liabilities that have been assumed by B&W and does reflect the effects of some of the assets that have been transferred to, and liabilities that have been assumed by, BWC, including the assets and liabilities associated with BWC's Nuclear Energy segment, which were previously part of B&W and were transferred to BWC prior to the spin-off. |
Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7, and the consolidated and combined financial statements included in Item 8 of this annual report.
We are subject to continuing contingent liabilities of BWC following the spin-off.
As a result of the spin-off, there are several significant areas where the liabilities of BWC may become our obligations. For example, under the Internal Revenue Code of 1986, as amended (the "Code") and the related rules and regulations, each corporation that was a member of BWC consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spin-off is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for that taxable period. We entered into a tax sharing agreement with BWC in connection with the spin-off that allocates the responsibility for prior period taxes of BWC consolidated tax reporting group between us and BWC and its subsidiaries. However, if BWC were unable to pay, we could be required to pay the entire amount of such taxes. Other provisions of law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities. The other contingent liabilities include personal injury claims or environmental liabilities related to BWC's historical nuclear operations. For example, BWC has agreed to indemnify us for personal injury claims and environmental liabilities associated with radioactive materials related to the operation, remediation, and/or decommissioning of two former nuclear fuel processing facilities located in the Borough of Apollo and
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Parks Township, Pennsylvania. To the extent insurance providers and third party indemnitors do not cover those liabilities, and BWC was unable to pay, we could be required to pay for them.
The spin-off could result in substantial tax liability.
The spin-off was conditioned on BWC's receipt of an opinion of counsel, in form and substance satisfactory to BWC, substantially to the effect that, for United States federal income tax purposes, the spin-off qualifies under Section 355 of the Code, and certain transactions related to the spin-off qualify under Sections 355 and/or 368 of the Code. The opinion relied on, among other things, various assumptions and representations as to factual matters made by BWC and us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by such counsel in its opinion. The opinion is not binding on the United States Internal Revenue Service ("IRS") or the courts, and there can be no assurance that the IRS or the courts will not challenge the conclusions stated in the opinion or that any such challenge would not prevail.
We are not aware of any facts or circumstances that would cause the assumptions or representations that were relied on in the opinion to be inaccurate or incomplete in any material respect. If, notwithstanding receipt of the opinion, the spin-off were determined not to qualify under Section 355 of the Code, each United States holder of BWC common stock who received shares of our common stock in the spin-off would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares of our common stock received. In addition, if certain related preparatory transactions were to fail to qualify for tax-free treatment, they would be treated as taxable asset sales and/or distributions.
Under the terms of the tax sharing agreement we entered into in connection with the spin-off, we and BWC generally share responsibility for any taxes imposed on us or BWC and its subsidiaries in the event that the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment. However, if the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment because of actions or failures to act by us or BWC, we or BWC, respectively, would be responsible for all such taxes. If we are liable for taxes under the tax sharing agreement, that liability could have a material adverse effect on us.
Potential liabilities associated with obligations under the tax sharing agreement cannot be precisely quantified at this time.
Under the terms of the tax sharing agreement we entered into in connection with the spin-off, we are generally responsible for all taxes attributable to us or any of our subsidiaries, whether accruing before, on or after the date of the spin-off. We and BWC generally share responsibility for all taxes imposed on us or BWC and its subsidiaries in the event the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment. However, if the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment because of actions or failures to act by us or BWC, we or BWC, respectively would be responsible for all such taxes. Our liabilities under the tax sharing agreement could have a material adverse effect on us. At this time, we cannot precisely quantify the amount of liabilities we may have under the tax sharing agreement and there can be no assurances as to their final amounts.
Under some circumstances, we could be liable for any resulting adverse tax consequences from engaging in significant strategic or capital raising transactions.
Even if the spin-off otherwise qualifies as a tax-free distribution under Section 355 of the Code, the spin-off and certain related transactions may result in significant United States federal income tax liabilities to us under Section 355(e) and other applicable provisions of the Code if 50% or more of BWC's stock or our stock (in each case, by vote or value) is treated as having been acquired, directly or indirectly, by one or more persons as part of a plan (or series of related transactions) that includes the spin-off. Any acquisitions of BWC stock or our stock (or similar acquisitions), or any understanding, arrangement or substantial negotiations regarding such an acquisition of BWC stock or our stock (or similar acquisitions), within two years before or after the spin-off are subject to special scrutiny. The process for determining whether an acquisition triggering those provisions has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case.
Under the terms of the tax sharing agreement we entered into in connection with the spin-off, BWC generally is liable for any such tax liabilities. However, we are required to indemnify BWC against any such tax liabilities that result from actions taken or failures to act by us. As a result of these rules and contractual provisions, we may be unable, within the two year period
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following the spin, to engage in strategic or capital raising transactions that our stockholders might consider favorable, or to structure potential transactions in the manner most favorable to us, without certain adverse tax consequences.
Potential indemnification liabilities to BWC pursuant to the master separation agreement could materially adversely affect B&W.
The master separation agreement with BWC provides for, among other things, the principal corporate transactions required to effect the spin-off, certain conditions to the spin-off and provisions governing the relationship between B&W and BWC with respect to and resulting from the spin-off. Among other things, the master separation agreement provides for indemnification obligations designed to make B&W financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the spin-off, as well as those obligations of BWC assumed by us pursuant to the master separation agreement. If we are required to indemnify BWC under the circumstances set forth in the master separation agreement, we may be subject to substantial liabilities.
In connection with our separation from BWC, BWC has agreed to indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that BWC's ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the master separation agreement, BWC has agreed to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that BWC agreed to retain, and there can be no assurance that the indemnity from BWC will be sufficient to protect us against the full amount of such liabilities, or that BWC will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from BWC any amounts for which we are held liable, we may be temporarily required to bear these losses.
Several members of our board and management may have conflicts of interest because of their ownership of shares of common stock of BWC (now known as BWX Technologies, Inc.).
Several members of our board and management own shares of common stock of BWC and/or options to purchase common stock of BWC because of their current or prior relationships with BWC. In addition, six of the current members of our board of directors were members of the BWC board of directors. This share ownership by these six directors could create, or appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different implications for B&W and BWC.
Risks Relating to Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile.
The market price of our common stock could fluctuate significantly in future periods due to a number of factors, many of which are beyond our control, including:
• | fluctuations in our quarterly or annual earnings or those of other companies in our industry; |
• | failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders or changes by securities analysts in their estimates of our future earnings; |
• | announcements by us or our customers, suppliers or competitors; |
• | the depth and liquidity of the market for B&W common stock; |
• | changes in laws or regulations that adversely affect our industry or us; |
• | changes in accounting standards, policies, guidance, interpretations or principles; |
• | general economic, industry and stock market conditions; |
• | future sales of our common stock by our stockholders; |
• | future issuances of our common stock by us; |
• | our ability to pay dividends in the future; and |
• | the other factors described in these "Risk Factors" and other parts of this annual report. |
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Substantial sales of our common stock could cause our stock price to decline and issuances by us may dilute our common stockholders' ownership in B&W.
As of December 31, 2016, we have an aggregate of approximately 48.7 million shares of common stock outstanding. Any sales of substantial amounts of our common stock could lower the market price of our common stock and impede our ability to raise capital through the issuance of equity securities. Further, if we were to issue additional equity securities to raise additional capital, our stockholders' ownership interests in B&W will be diluted and the value of our common stock may be reduced.
We do not currently pay regular dividends on our common stock, so holders of our common stock may not receive funds without selling their shares of our common stock.
We have no current intent to pay a regular dividend. Our board of directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of applicable law, contractual restrictions limiting our ability to pay dividends, our earnings and cash flows, our capital requirements, our financial condition, and other factors our board of directors deems relevant. Accordingly, our stockholders may have to sell some or all of their shares of our common stock in order to generate cash flow from their investment.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of B&W, even if that change may be considered beneficial by some stockholders.
The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of B&W that a stockholder may consider favorable.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make B&W immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of B&W and our stockholders.
We may issue preferred stock that could dilute the voting power or reduce the value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
Item 1B. Unresolved Staff Comments
None
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Item 2. Properties
The following table provides the segment, location and general use of each of our principal properties that we own or lease at December 31, 2016.
Business Segment and Location | Principal Use | Owned/Leased (Lease Expiration) | |
Power segment | |||
Barberton, Ohio | Administrative office / research and development | Owned(1) | |
Lancaster, Ohio | Manufacturing facility | Owned(1) | |
Copley, Ohio | Warehouse / service center | Owned(1) | |
Dumbarton, Scotland | Manufacturing facility | Owned | |
Guadalupe, NL, Mexico | Manufacturing facility | Leased (2024) | |
Cambridge, Ontario, Canada | Administrative office / warehouse | Leased (2018) | |
Jingshan, Hubei, China | Manufacturing facility | Owned | |
Ebensburg, Pennsylvania | Power generation | Owned(1) | |
Renewable segment | |||
Copenhagen, Denmark | Administrative office | Leased | |
Esbjerg, Denmark | Manufacturing facility / administrative office | Owned | |
Straubing, Germany | Manufacturing facility | Leased (2021) | |
Industrial segment | |||
De Pere, Wisconsin | Manufacturing facility / administrative office | Owned(1) | |
Arona, Italy | Administrative offices / research and development | Leased (2022) | |
San Diego, California | Administrative office | Leased (2017) | |
Shanghai, China | Manufacturing facility | Owned | |
Ding Xiang, Xin Zhou, Shan Xi, China | Manufacturing facility | Leased (2019/2020) | |
Corporate office | |||
Charlotte, North Carolina | Administrative office | Leased (2019) | |
(1) These properties are encumbered by liens under existing credit facilities.
As a result of our January 11, 2017 acquisition of Universal, we added two manufacturing facilities and an administrative office in Wisconsin and a manufacturing facility in San Luis Potosi, Mexico. We believe that our major properties are adequate for our present needs and, as supplemented by planned improvements and construction, expect them to remain adequate for the foreseeable future.
Item 3. Legal Proceedings
The information set forth under the heading "Litigation" in Note 20 to our consolidated and combined financial statements included in Item 8 is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures
We own, manage and operate Ebensburg Power Company, an independent power company that produces alternative electrical energy. Ebensburg Power Company operates multiple coal refuse sites in Western Pennsylvania (collectively, the "Coal Refuse Sites"). At the Coal Refuse Sites, Ebensburg Power Company utilizes coal refuse from abandoned surface mine lands to produce energy. Beyond converting the coal refuse to energy, Ebensburg Power Company is also taking steps to reclaim the former surface mine lands to make the land and streams more attractive for wildlife and human uses.
The Coal Refuse Sites are subject to regulation by the Federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by
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Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and this Item is included in exhibit 95 to this annual report.
PART II
Item 5. Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol BW. High and low common stock prices in the quarterly periods after our spin-off transaction through December 31, 2016 were as follows:
Share Price | Dividends | ||||||||||
Quarter ended | High | Low | Per Share | ||||||||
June 30, 2015 | $ | 22.31 | $ | 17.12 | $ | — | |||||
September 30, 2015 | $ | 21.95 | $ | 16.40 | $ | — | |||||
December 31, 2015 | $ | 21.67 | $ | 15.86 | $ | — | |||||
March 31, 2016 | $ | 22.17 | $ | 17.95 | $ | — | |||||
June 30, 2016 | $ | 23.99 | $ | 14.32 | $ | — | |||||
September 30, 2016 | $ | 17.30 | $ | 14.27 | $ | — | |||||
December 31, 2016 | $ | 17.72 | $ | 12.90 | $ | — | |||||
As of February 20, 2017, there were approximately 1,866 record holders of our common stock.
Issuer Purchases of Equity Securities
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) (1) | |||||||||
October 1, 2016 - October 31, 2016 | 81 | $ | 15.99 | — | $ | 100,000 | |||||||
November 1, 2016 - November 30, 2016 | 181 | $ | 15.94 | — | $ | 100,000 | |||||||
December 1, 2016 - December 31, 2016 | 939 | $ | 15.26 | — | $ | 100,000 | |||||||
Total | 1,201 | — | |||||||||||
(1) | On August 4, 2016, we announced that our board of directors authorized the repurchase of an indeterminate number of our shares of common stock in the open market at an aggregate market value of up to $100 million over the next twenty-four months. As of February 28, 2017, we have not made any share repurchases under the August 4, 2016 share repurchase authorization. |
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The following graph provides a comparison of our cumulative total shareholder return through December 31, 2016 to the return of the S&P 500 and our custom peer group.
(1) | Assumes initial investment of $100 on June 30, 2015. |
The peer group used for the comparison above is comprised of the following companies:
Actuant Corp. | Crane Co. | Itron Inc. |
AMETEK Inc. | Curtiss-Wright Corp. | MasTec Inc. |
CECO Environmental Corp. | Dycom Industries Inc. | Primoris Services Corp. |
Chart Industries Inc. | Flowserve Corp. | SPX Corp. |
CIRCOR Int. Inc. | Harsco Corp. | |
Covanta Holding Corp. | Idex Corp. | |
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Item 6. Selected Financial Data
For the Years Ended | |||||||||||||||||||
(in thousands, except for per share amounts) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Revenues | $ | 1,578,263 | $ | 1,757,295 | $ | 1,486,029 | $ | 1,767,651 | $ | 1,992,899 | |||||||||
Income (loss) from continuing operations | (115,082 | ) | 16,534 | (11,890 | ) | 140,478 | 128,809 | ||||||||||||
Net income attributable to Babcock & Wilcox Enterprises, Inc. | (115,649 | ) | 19,141 | (26,528 | ) | 174,527 | 140,753 | ||||||||||||
Basic earnings per common share: | |||||||||||||||||||
Income (loss) from continuing operations per common share | (2.31 | ) | 0.30 | $ | (0.23 | ) | 2.49 | 2.16 | |||||||||||
Net income attributable to Babcock & Wilcox Enterprises, Inc. | (2.31 | ) | 0.36 | (0.49 | ) | 3.10 | 1.96 | ||||||||||||
Total assets (as of year end) | $ | 1,529,143 | $ | 1,663,045 | $ | 1,516,554 | $ | 1,290,228 | $ | 1,413,420 | |||||||||
Our Power segment experienced a decline in sales volume in 2016 resulting from the decline in activity related to the coal-fired power and industrial steam generation markets in the United States. Because of our proactive restructuring activities during the summer of 2016 (discussed below), gross margins in the Power segment increased compared to 2015.
Our 2016 results were significantly impacted by the performance of an operating unit within our Renewable segment, which recorded $141.1 million in losses from changes in the estimated forecasted cost to complete renewable energy contracts in Europe.
Our Industrial segment benefited from the acquisition of SPIG during 2016, which contributed $96.3 million of revenue and $7.8 million of gross profit to the Industrial segment. On June 20, 2014, we purchased MEGTEC, which is also part of our Industrial segment. Our MEGTEC business generated revenues of $157.3 million, $183.7 million and $105.4 million and gross profit of $42.9 million, $54.8 million and $30.4 million in the years ended December 31, 2016, 2015 and 2014, respectively.
We sold all of our interest in our Australian joint venture, Halley & Mellowes Pty. Ltd., on December 22, 2016 for $18.0 million, resulting in a gain of $8.3 million.
We recognize actuarial gains (losses) related to our pension and postretirement benefit plans in earnings in the fourth quarter each year as a component of net periodic benefit cost. The effect of these adjustments for 2016, 2015, 2014, 2013 and 2012 and on pre-tax income was a gain (loss) of $(24.1) million, $(40.2) million, $(101.3) million, $92.1 million and $(8.4) million, respectively.
In each of the annual periods from 2012 through 2015, we recognized contract losses for additional estimated costs to complete our Power segment's Berlin Station project. This project experienced unforeseen worksite conditions and fuel specification issues that caused schedule delays, resulting in us filing suit against the customer in January 2014. The dispute was settled during the third quarter of 2015. The contract losses reduced pre-tax income (or increased pre-tax losses) from continuing operations by $9.6 million, $11.6 million, $35.6 million and $16.9 million in 2015, 2014, 2013 and 2012, respectively.
Restructuring and spin-off transaction costs were $40.8 million, $14.9 million and $20.2 million in 2016, 2015, and 2014, respectively. On June 28, 2016, we announced actions to restructure our power business in advance of significantly lower demand now projected for power generation from coal in the United States. The costs associated with this restructuring were $31.4 million in 2016, and were primarily related to employee severance, non-cash impairment of the long-lived assets at B&W's one coal-fired power plant located in Ebensburg, Pennsylvania, costs associated with organizational realignment of personnel and processes and an increase in valuation allowances associated with our deferred tax assets. The 2016 restructuring activities are expected to allow our Power segment to continue to serve the power market and maintain gross margins, despite the expected decline in volume as a result of the lower projected demand in the US coal-fired power generation market. Subsequent to the June 30, 2015 spin-off transaction, we incurred $3.8 million and $3.3 million of spin-off related transaction costs, respectively.
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In the year ended December 31, 2015, we recognized a $14.6 million impairment charge, primarily related to research and development facilities and equipment dedicated to activities that were determined not to be commercially viable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
In this annual report, unless the context otherwise indicates, "B&W," "we," "us" and "our" mean Babcock & Wilcox Enterprises, Inc. and its consolidated subsidiaries.
Our assessment of operating results is based on three reportable segments:
• | Power: Focused on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. |
• | Renewable: Focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. |
• | Industrial: Focused on custom-engineered cooling, environmental, and other industrial equipment along with related aftermarket services. |
Executive summary of results
We generally recognize revenues and related costs from long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as work progresses and reflect adjustments in profit proportionate to the percentage of completion in the periods in which we revise estimates to complete the contract. To the extent that these adjustments result in a reduction of previously reported profits from a project, we recognize a charge against current earnings. Changes in the estimated results of our percentage-of-completion contracts are necessarily based on information available at the time that the estimates are made and are based on judgments that are inherently uncertain as they are predictive in nature. As with all estimates to complete used to measure contract revenue and costs, actual results can and do differ from our estimates made over time.
During 2016, we recorded a total of $141.1 million in losses from changes in the estimated revenues and costs to complete renewable energy contracts in Europe, of which $98.1 million were recorded in the fourth quarter of 2016. These 2016 losses include $35.8 million of anticipated liquidated damages that reduced revenue.
As we disclosed in prior reports, we incurred $30.9 million in charges (net of $15.0 million of a probable insurance recovery) due to changes in the estimated cost to complete a contract during the second and third quarters of 2016 related to one European renewable energy project. Additional changes in the fourth quarter of 2016 resulted in $19.4 million of additional charges on this project, and this project adversely impacted other European renewable energy projects due to the limited pool of internal and external resources available for these projects, such as engineering, procurement and construction resources, which in turn caused us to revise downward our estimates with respect to our other European renewable energy projects, including three other projects that became loss contracts. As of December 31, 2016, this project is approximately 88% complete. We continue to expect construction activities to be completed and the unit to be operational in early 2017, with remaining commissioning and turnover activities linked to the customer's operation of the facility through mid-2017.
The second project became a loss contract in the fourth quarter of 2016, resulting from a charge of $28.1 million in 2016 ($23.0 million in the fourth quarter). As of December 31, 2016, this second project was approximately 67% complete. We expect this second project to be completed in late-2017.
The third project became a loss contract in the fourth quarter, resulting from $30.1 million of the 2016 charges ($25.2 million in the fourth quarter of 2016). As of December 31, 2016, this third project was approximately 82% complete. We expect this third project to be completed in mid-2017.
The fourth project became a loss contract in the fourth quarter of 2016, resulting from $16.4 million of the 2016 charges ($16.2 million in the fourth quarter). As of December 31, 2016, this fourth project was approximately 61% complete. We expect this fourth project to be completed in 2018.
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We recorded an aggregate of $14.2 million of additional charges in the fourth quarter of 2016 for changes in estimated costs to complete other renewable energy projects. The cumulative effect of the changes in estimates in the Renewable segment also resulted in $15.7 million of non-cash income tax expense from establishing valuation allowances on the deferred income tax assets.
We expect all of the renewable energy projects changes in estimates to negatively affect our 2017 results of operations by $27.9 million.
On June 28, 2016, we announced actions to restructure our business that serves the United States power generation market in advance of updated projections for domestic power generation from coal-fired power plants. The restructuring reduced the size of our organization supporting the United States coal power generation market by approximately 20% and reorganized how we support the power market by redesigning the work flow to provide an effective, flexible organization that can adapt to changing market conditions and demand. During the year, we also faced a decline in revenue from sales of our industrial steam generation products to non-utility customers. Economic uncertainties globally as well as domestic political uncertainty led to reduced industrial capital expenditure spending during the year, and in turn impacted revenue, which, as expected, was down 21.0% compared to 2015. Because of our proactive restructuring actions, we were able to improve our gross margin percentage even with the decline in revenue in the Power segment. Restructuring charges from these actions totaled $31.4 million, which included $14.1 million of severance and $14.9 million of non-cash impairment of the long-lived assets at B&W’s one coal-fired power plant. Also related to these restructuring activities, we recorded $13.1 million of non-cash income tax expense to increase valuation allowances on deferred income tax assets associated with our equity investment in a foreign joint venture and certain state net operating loss carryforwards.
Growth in the industrial segment was driven by the July 1, 2016 acquisition of SPIG S.p.A. ("SPIG") a global provider of custom-engineered cooling systems and services, for €152.4 million (or approximately $169 million) in cash, net of working capital adjustments. SPIG provides comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. The acquisition of SPIG is consistent with our goal to grow and diversify our technology-based offerings with new products and services in the industrial markets that are complementary to our core businesses. In 2016, SPIG contributed $96.3 million of revenue and $7.8 million of gross profit to the Industrial segment. In 2017, we expect to realize revenue synergies from our newly combined resources. Industrial segment results were also impacted by lower spending activity in the United States market, which primarily affected our MEGTEC business where we have seen customers delaying investment in their manufacturing facilities. Improved bookings in the fourth quarter combined with a strengthening of industrial production indices suggest that United States industrial markets are showing signs of stabilizing.
On January 11, 2017, we acquired Universal Acoustic and Emission Technologies, Inc. ("Universal"), for approximately $55 million in cash. The acquisition will include post-closing adjustments related to differences in actual net indebtedness and transaction expenses compared to estimates. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures. The acquisition of Universal is expected to add approximately $80 million of annual revenue to our Industrial segment and be complementary to the products offered in each of our business segments, but particularly to our core businesses in the industrial markets.
Year-over-year comparisons are also affected by the following items:
• | Mark to market ("MTM") losses for our pension and other postretirement benefit plans were $24.1 million, $40.2 million and $101.3 million in 2016, 2015 and 2014, respectively. These losses are based on actual plan asset returns and changes in assumptions in the measurement of the related benefit plan liabilities, which are more fully described in Note 18 to the consolidated and combined financial statements included in Item 8. |
• | We sold our interest in our Australian joint venture, Halley & Mellowes Pty. Ltd. ("HMA"), on December 22, 2016 for $18.0 million, resulting in a gain of $8.3 million. The gain on sale is classified in equity in income of investees in 2016. |
• | Restructuring costs totaled $37.0 million, $11.7 million and $20.2 million in 2016, 2015 and 2014, respectively, for a number of both completed and ongoing initiatives designed to phase in savings and make our products more competitive. Restructuring costs include accelerated depreciation and other activities related to manufacturing |
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facility consolidation and outsourcing as well as reductions in force, consulting and other costs. In addition to savings already realized, we expect to realize savings of approximately $15 million in 2017. The $11 million of expected costs to achieve these savings are primarily related to office reconfiguration, consulting and facility demolition and consolidation activities.
• | Asset impairments in 2016 were $14.9 million, which were associated with impairment of the long-lived assets at B&W’s one coal-fired power plant. The non-cash impairment charge is classified in restructuring costs in 2016. |
• | Asset impairments totaling $14.6 million were recognized in 2015 primarily related to research and development facilities and equipment dedicated to activities that were determined not to be commercially viable. The non-cash impairment charge is classified in loss on disposal of assets in 2015. |
• | The outcome of the Arkansas River Power Authority litigation in December 2016 resulted in a net $3.2 million reduction in the 2016 results of operations in our Power segment, which included a $4.2 million revenue reversal, a $2.3 million decrease in cost of operations and $1.3 million of legal costs (included in selling, general and administrative expenses ("SG&A")). |
• | Litigation settlement charges of $9.6 million were incurred in 2015, including $1.8 million of legal costs and a $7.8 million reversal of Power segment revenue associated with the release of an accrued claims receivable as part of the legal settlement related to the Berlin Station project. |
• | Spin-off transaction costs were $3.8 million and $3.3 million 2016 and 2015, respectively, primarily related to retention stock awards that had a one-year vesting period. |
• | SG&A includes the incremental costs of being a separate stand-alone public company, such as costs to create separate accounting, legal, senior management and tax teams. We incurred approximately $13.5 million and $8.5 million in 2016 and in the second half of 2015, respectively. Due to the scope and complexity of these activities, the amount and timing of these incremental expenses could vary and initial run rates could be slightly higher than the expected annual amounts incurred in 2016 and 2015. Prior to the spin-off, we received allocations from BWC that were included in our SG&A. These pre-spin allocations also included $2.7 million, and $5.3 million in 2015 and 2014, related to the Nuclear Energy segment that was transferred to BWC at the time of the spin-off. The Nuclear Energy segment is treated as discontinued operations in our financial statements, but these related cost allocations remain in the SG&A expenses of our continuing operations. |
• | SG&A in 2016 included $2.4 million of acquisition and integration related costs associated with the acquisition and integration of SPIG during 2016 and the acquisition of Universal in early 2017. |
• | Intangible asset amortization expense from the SPIG acquisition in 2016 was $13.3 million, and we expect amortization of the SPIG intangible assets to result in approximately $8.9 million of expense in 2017. Intangible amortization is not allocated to the segment results. |
Spin-Off Transaction
On June 8, 2015, the board of directors of The Babcock & Wilcox Company (now known as BWX Technologies, Inc.) ("BWC" or the "former Parent") approved the spin-off of B&W through the distribution of shares of B&W common stock to holders of BWC common stock. The distribution of B&W common stock was made on June 30, 2015, and consisted of one share of B&W 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 B&W common stock. On June 30, 2015, B&W became a separate publicly traded company, and BWC did not retain any ownership interest in B&W. We filed our Form 10 describing the spin-off with the Securities and Exchange Commission, which was declared effective on June 16, 2015. The spin-off is further described in Note 1 to the consolidated and combined financial statements included in Item 8 of this annual report.
Our segment and other operating results are described in more detail below.
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RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2016, 2015 and 2014
Consolidated and combined results of operations
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
REVENUES | |||||||||||
Power segment | $ | 975,478 | $ | 1,234,997 | $ | 1,156,579 | |||||
Renewable segment | 349,172 | 338,603 | 224,032 | ||||||||
Industrial segment | 253,613 | 183,695 | 105,418 | ||||||||
$ | 1,578,263 | $ | 1,757,295 | $ | 1,486,029 | ||||||
GROSS PROFIT | |||||||||||
Power segment | $ | 233,550 | $ | 247,632 | $ | 237,491 | |||||
Renewable segment | (68,109 | ) | 57,682 | 53,449 | |||||||
Industrial segment | 50,726 | 54,826 | 30,400 | ||||||||
Intangible asset amortization expense included in cost of operations | (15,842 | ) | (7,676 | ) | (7,501 | ) | |||||
Mark to market loss included in cost of operations | (21,208 | ) | (44,307 | ) | (94,806 | ) | |||||
$ | 179,117 | $ | 308,157 | $ | 219,033 | ||||||
Research and development costs | (10,406 | ) | (16,543 | ) | (18,483 | ) | |||||
Gains (losses) on asset disposals and impairments, net | 32 | (14,597 | ) | (1,752 | ) | ||||||
Selling, general and administrative expenses | (240,166 | ) | (240,296 | ) | (215,379 | ) | |||||
Restructuring and spin-off transaction costs | (40,807 | ) | (14,946 | ) | (20,183 | ) | |||||
Equity in income (loss) of investees | 16,440 | (242 | ) | 8,681 | |||||||
Intangible asset amortization expense in SG&A | (4,081 | ) | (3,769 | ) | (2,659 | ) | |||||
Mark to market (loss) gain included in SG&A | (2,902 | ) | 4,097 | (7,233 | ) | ||||||
Operating income (loss) | $ | (102,773 | ) | $ | 21,861 | $ | (37,975 | ) | |||
The presentation of the components of our revenues and gross profit in the table above is consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business.
2016 vs 2015 Consolidated and combined results
Revenues decreased 10.2%, or $179 million, to $1.58 billion in 2016 compared to $1.76 billion in 2015 due to a $259.5 million decrease in Power segment revenues, partially offset by increases in revenues of $10.6 million and $69.9 million in our Renewable and Industrial segments, respectively. The SPIG acquisition, which was completed on July 1, 2016, contributed revenues of $96.3 million in 2016.
Gross profit decreased $129.0 million to $179.1 million in 2016 from $308.2 million in 2015. Excluding the MTM charges shown above, gross profit decreased $152.1 million to $200.3 million in 2016 from $352.5 million in 2015 primarily due to the decline in our Renewable segment's project performance during 2016.
Operating income decreased $124.6 million to an operating loss of $102.8 million in 2016 compared to operating income of $21.9 million in 2015. In addition to the gross profit decrease discussed above, the primary drivers of the decrease in our operating income in 2016 were a $25.9 million increase in restructuring charges primarily related to our Power segment restructuring in June 2016, partially offset by a $14.6 million decrease in loss on asset disposals and impairments compared to 2015, $16.1 million lower mark to market charges compared to 2015 and a $8.3 million gain from the sale of all of our interest in our Australian joint venture in 2016.
The performance drivers of each segment as well as other operating costs are discussed in more detail below.
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2015 vs 2014 Consolidated and combined results
Revenues increased 18.3%, or $271.3 million, to $1.76 billion in 2015 compared to $1.49 billion in 2014 due primarily to increases in revenues from our Power, Renewable and Industrial segments of $78.4 million, $114.6 million and $78.3 million, respectively. The MEGTEC acquisition which was completed on June 20, 2014, contributed $183.7 million of revenues in 2015 compared to $105.4 million in 2014.
Gross profit increased $89.1 million to $308.2 million in the year ended December 31, 2015 from $219.0 million in 2014. Excluding the MTM charges shown above, gross profit increased $38.6 million to $352.5 million in 2015 from $313.8 million in 2014 primarily due to the inclusion of our MEGTEC business for a full year and increases in the volume of utility, industrial and renewable energy boiler projects in our Power and Renewable segments.
Operating income increased $59.8 million to $21.9 million in 2015 from an operating loss of $38.0 million in 2014. Operating income includes significant charges for MTM, restructuring and spin-off transaction costs and asset impairments that are each illustrated above and described in more detail below. Excluding these items, 2015 operating income would have increased $5.6 million from 2014 primarily from the gross margin improvements described above partially offset by increases in selling, general and administrative increases from inclusion of a full year of our MEGTEC business and the incremental stand-alone costs to operate our business as an independent public entity since the spin-off. Operating income in 2015 also decreased due to a $8.9 million decrease in equity in income of investees described below.
Segment descriptions
Our operations are assessed based on three reportable segments, which changed beginning in the third quarter of 2016 with the acquisition of SPIG as described in Note 4. Segment results for prior periods have been restated for comparative purposes.
• | Power: Focused on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. |
• | Renewable: Focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. |
• | Industrial: Focused on custom-engineered cooling, environmental, and other industrial equipment along with related aftermarket services. Beginning in 2017, the Universal acquisition adds custom-engineered acoustic, emission and filtration solutions to the segment. |
Power segment
Our Power segment focuses on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. The 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, serving large steam generating utility and industrial customers globally. 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. Our auxiliary equipment includes boiler cleaning equipment and material handling equipment.
Our worldwide new build boiler and environmental products businesses serve large steam generating and industrial customers. The segment provides a full suite of product and service offerings including engineering, procurement, specialty manufacturing, construction and commissioning. The segment's boilers include utility boilers and industrial boilers fired with coal and natural gas. Our boiler products include advanced supercritical boilers, subcritical boilers, fluidized bed boilers, chemical recovery boilers, industrial power boilers, package boilers, heat recovery steam generators and waste heat boilers.
Our environmental systems offerings include air pollution control products and related equipment for the treatment of nitrogen oxides, sulfur dioxide, fine particulate, mercury, acid gases and other hazardous air emissions, including carbon dioxide capture and sequestration technologies, 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.
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The segment also receives license fees and royalty payments through licensing agreements of our proprietary technologies.
While opportunities to increase revenues in the segment are limited, we are striving to grow margins by:
• | selectively bidding projects in emerging international markets needing state-of-the-art technology for fossil power generation and environmental systems; |
• | growing sales of industrial steam generation products in the petrochemical and pulp & paper markets, such as heat recovery, natural gas and oil fired package boilers, due in part to lower fuel prices; |
• | continuing our strong service presence in support of our installed fleet of steam generation equipment and expand support of other OEM equipment; and |
• | lowering costs through a focus on operational efficiencies. |
We focus our research dollars on improving our products for the markets we serve through: (i) cost reductions resulting in more competitive products in a highly competitive global market and margin improvement; (ii) reduced performance risk assuring our products meet our and our customers’ expectations; and (iii) standards development and updates, which results in lower engineering hours consumed on projects and enables us to sublet engineering to low cost engineering centers of excellence.
Power segment results
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
(in thousands, except percentages) | 2016 | 2015 | $ Change | 2015 | 2014 | $ Change | |||||||||||||||||
Revenues | $ | 975,478 | $ | 1,234,997 | $ | (259,519 | ) | $ | 1,234,997 | $ | 1,156,579 | $ | 78,418 | ||||||||||
Gross profit | 233,550 | 247,632 | (14,082 | ) | 247,632 | 237,491 | 10,141 | ||||||||||||||||
% of revenues | 23.9 | % | 20.1 | % | 20.1 | % | 20.5 | % | |||||||||||||||
2016 vs 2015 results
Revenues decreased 21.0%, or $259.5 million, to $975.5 million in 2016 from $1.23 billion in 2015. The decrease in the segment's revenues reflect the accelerated decline in activities in the United States coal-fired generation market and a decline in sales of our industrial steam generation products to non-utility customers in North America. These declines resulted in lower revenues in all of our Power segment product lines.
Gross profit decreased $14.1 million to $233.5 million in 2016 from $247.6 million in 2015. While the 2016 decrease in gross profit was in-line with the 21.0% decrease in revenues, our Power segment's gross margin percentage improved in 2016 across all of our product lines as a result of the restructuring efforts in June 2016. Also contributing to the increase in our gross margin percentage is a $41.5 million increase in the gross profit contribution from construction projects in 2016 as a result of improved project performance. In 2015, gross profit was negatively impacted by a loss of $11.6 million on the Berlin Station project.
2015 vs 2014 results
Revenues increased 6.8%, or $78.4 million, to $1.23 billion in 2015 from $1.16 billion in 2014. Revenues were higher than the prior year across all of our product lines, except for aftermarket parts, which declined by $28.9 million.
Gross profit increased $10.1 million to $247.6 million in 2015 from $237.5 million in 2014, primarily due to a loss provision of $9.6 million on the Berlin Station project in 2015 as compared to a loss provision of $11.6 million in 2014.
Renewable segment
Our Renewable segment provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries, and plant operations and maintenance services for our full complement of systems and equipment. We deliver these products and services to a large base of customers primarily in Europe through our extensive network of technical support personnel and global sourcing capabilities. Our customers consist of traditional, renewable and carbon neutral power utility companies that require steam generation and environmental control technologies to enable beneficial use of municipal waste and biomass. This segment's activity is dependent on the demand for electricity and
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ultimately the capacity utilization and associated operations and maintenance expenditures of waste-to-energy power generating companies and other industries that use steam to generate energy.
Globally, efforts to reduce the environmental impact of burning fossil fuels may create opportunities for us as existing generating capacity is replaced with cleaner technologies. We expect growth in backlog in the second half of 2017 and beyond, primarily from renewable waste-to-energy projects, as we continue to see numerous opportunities around the globe, although the rate of backlog growth is dependent on many external factors. We have elected to limit bidding any additional Renewable contracts that involve our European resources for at least the first six months of 2017 as we work through our existing contracts.
Renewable segment results
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
(in thousands, except percentages) | 2016 | 2015 | $ Change | 2015 | 2014 | $ Change | |||||||||||||||||
Revenues | $ | 349,172 | $ | 338,603 | $ | 10,569 | $ | 338,603 | $ | 224,032 | $ | 114,571 | |||||||||||
Gross profit | (68,109 | ) | 57,682 | (125,791 | ) | 57,682 | 53,449 | 4,233 | |||||||||||||||
% of revenues | (19.5 | )% | 17.0 | % | 17.0 | % | 23.9 | % | |||||||||||||||
2016 vs 2015 results
Revenues increased 3.1%, or $10.6 million to $349.2 million in 2016 from $338.6 million in 2015. The increase in revenue in 2016 is primarily attributable to an increase in the level of activity on our renewable energy contracts. Our operations and maintenance services also contributed $2.4 million more to the segment's revenues in 2016.
Gross profit decreased $125.8 million in 2016 from $57.7 million in 2015 to a loss of $68.1 million in 2016. The decrease is attributable to $141.1 million in losses from changes in the estimated forecasted cost to complete renewable energy contracts in Europe, partially offset by an increase in gross profit from our operations and maintenance services. During 2016, four of the segment's renewable energy projects became loss contracts. See additional details in Note 6 to the consolidated and combined financial statements included in Item 8 of this annual report.
2015 vs 2014 results
Revenues increased 51.1%, or $114.6 million, to $338.6 million in 2015 from $224.0 million in 2014. This increase was primarily attributable to a significant increase in the level of activity on new renewable energy contracts.
Gross profit increased $4.2 million to $57.7 million in 2015 from $53.4 million in 2014, primarily due to the increase in the number of renewable energy contracts during 2015.
Industrial segment
Through December 31, 2016, our Industrial segment was comprised of our MEGTEC and SPIG businesses. Beginning with the first quarter of 2017, Universal will be added to the Industrial segment. The segment is focused on custom-engineered cooling, environmental, noise abatement and industrial equipment along with related aftermarket services.
We acquired MEGTEC on June 20, 2014. Through MEGTEC, we provide environmental products and services to numerous industrial end markets. MEGTEC designs, engineers and manufactures products including oxidizers, solvent and distillation systems, wet electrostatic precipitators, scrubbers and heat recovery systems. MEGTEC also provides engineered products, such as specialized industrial process systems, coating lines and equipment. MEGTEC's suite of technologies for pollution abatement includes systems that control volatile organic compounds and air toxins, particulate, nitrogen oxides and acid gas air emissions from industrial processes. MEGTEC serves a diverse set of industrial end markets globally with a current emphasis on the chemical, pharmaceutical, energy storage, packaging, and automotive markets. MEGTEC's activity is dependent primarily on the capacity utilization of operating industrial plants and an increased emphasis on environmental emissions globally across a broad range of industries and markets.
We acquired SPIG on July 1, 2016. It provides custom-engineered cooling systems, services and aftermarket products. SPIG’s product offerings include air-cooled (dry) cooling systems, mechanical draft wet cooling towers and natural draft wet
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cooling hyperbolic towers. SPIG also provides end-to-end aftermarket services, including spare parts, upgrades/revamps for existing installations and remote monitoring. SPIG's comprehensive dry and wet cooling solutions and aftermarket products and services are primarily provided to the power generation industry, including natural gas-fired and renewable energy power plants, and downstream oil and gas, petrochemical and other industrial end markets in the Europe, the Middle East and the Americas. SPIG's activity is dependent primarily on global energy demand from utilities and other industrial plants, regulatory requirements, water scarcity and energy efficiency needs.
We expect that our 2017 acquisition of Universal will complement the product and service offerings we are able to provide through our Industrial segment. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal’s product offering includes gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures. Historically, almost all of Universal's activity has been in the United States. With the integration with the Industrial segment, we expect its business to grow globally with the benefit of B&W's global network of current and future customers and the needs of noise abatement controls for natural gas power generation, natural gas pipelines and other industrial markets.
We see opportunities for growth in revenues in the Industrial segment relating to a variety of factors. Our new equipment customers purchase equipment as part of major capacity expansions, to replace existing equipment, or in response to regulatory initiatives. Additionally, our significant installed base provides a consistent and recurring aftermarket stream of parts, retrofits and services. Major investments in global chemical markets have strengthened demand for our industrial equipment, while tightening environmental and noise abatement regulations in the United States, China, India and other developing countries are creating new opportunities. We foresee long-term trends toward increased environmental and noise abatement controls for industrial manufacturers around the world. Together, the companies that comprise the Industrial segment are well-positioned to capitalize on opportunities in these markets. Additionally, we will continue to seek acquisitions to expand our market presence and technology offerings in our Industrial segment.
Industrial segment results
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
(in thousands, except percentages) | 2016 | 2015 | $ Change | 2015 | 2014 | $ Change | |||||||||||||||||
Revenues | $ | 253,613 | $ | 183,695 | $ | 69,918 | $ | 183,695 | $ | 105,418 | $ | 78,277 | |||||||||||
Gross profit | 50,726 | 54,826 | (4,100 | ) | 54,826 | 30,400 | 24,426 | ||||||||||||||||
% of revenues | 20.0 | % | 29.8 | % | 29.8 | % | 28.8 | % | |||||||||||||||
2016 vs 2015 results
Revenues increased 38.1%, or $69.9 million, to $253.6 million in 2016 from $183.7 million in 2015. The increase in revenues is primarily the result of our acquisition of SPIG on July 1, 2016, which contributed $96.3 million of revenue to the Industrial segment during the second half of 2016. Our MEGTEC business experienced a decline in revenues in 2016 across each of its product lines caused by the decline in demand in the United States. However, we believe the industrials market in the United States is showing signs of stabilizing.
Gross profit increased 7.5%, or $4.1 million, to $50.7 million in the year ended December 31, 2016, compared to $54.8 million in 2015. The SPIG business contributed gross profit of $7.8 million in 2016, which was partially offset by lower gross profit from MEGTEC in-line with the decrease in revenues during 2016. MEGTEC was able to improve its gross margin percentage in 2016 due to its mix of product revenues despite the overall decline in revenues and gross profit for the business. In addition, SPIG's gross margins have been historically lower than MEGTEC's, resulting in a decline in the 2016 gross margin percentage in the segment.
2015 vs 2014 results
The year-over-year comparison reflects twelve months of MEGTEC revenues and gross profit in 2015 compared to approximately six months in 2014.
Revenues increased 74.3%, or $78.3 million, to $183.7 million in 2015 from $105.4 million in 2014.
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Gross profit increased 80.2%, or $24.4 million, to $54.8 million in the year ended December 31, 2015, compared to $30.4 million in 2014. Gross profit in 2015 .
Selling, general and administrative expenses
SG&A increased $7.2 million to $247.1 million in 2016 from $240.0 million in 2015 due primarily to $5.1 million of acquisition and integration related costs related to the acquisitions of SPIG and Universal, $1.3 million of litigation expenses associated with the ARPA trial and the addition of $8.2 million of SG&A associated with SPIG. These increases in SG&A were partially offset by savings from our 2016 restructuring actions and reduced incentive compensation accruals.
SG&A increased $14.7 million to $240.0 million in 2015 from $225.3 million in 2014. The increase in SG&A in 2015 is primarily attributable to $17.5 million of SG&A associated with MEGTEC compared to $8.8 million in 2014 (MEGTEC was acquired on June 20, 2014), and an $8.5 million increase in stand-alone operating costs, discussed further below. In 2015, corporate allocations from our former Parent were $2.6 million lower than they were in 2014, which is discussed further below.
The additional stand-alone operating costs to operate our business as an independent public company exceeded the pre-spin allocations of expenses from BWC related to areas that include, but are not limited to, litigation and other legal matters, insurance, compliance with the Sarbanes-Oxley Act and other corporate governance matters. We estimated that we would incur annual incremental expenses of $14 million to $16 million, of which we incurred approximately $13.5 million and $8.5 million in 2016 and in the second half of 2015, respectively, to replace both the services previously provided by BWC as well as other stand-alone costs, such as costs to create separate accounting, legal, senior management and tax functions. We incurred significantly less than our estimate in 2016 due to the reversal of incentive compensation and other targeted overhead expense reductions. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and initial run rates could be slightly higher than the expected annual amounts incurred in 2016 and 2015.
As discussed in Note 1 to the consolidated and combined financial statements included in Item 8, we distributed assets and liabilities totaling $47.8 million associated with our Nuclear Energy ("NE") segment to BWC in conjunction with the spin-off on June 30, 2015. We received corporate allocations from our former Parent which totaled $2.7 million and $5.3 million for the years ended December 31, 2015 and 2014, respectively. Though these allocations related to our discontinued NE segment, they are included as part of selling, general and administrative expenses in the results from our continuing operations because allocations are not eligible for inclusion in discontinued operations.
Research and development costs
Research and development expenses relate to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. These expenses were $10.4 million, $16.5 million and $18.5 million in 2016, 2015 and 2014, respectively. We continuously evaluate each research and development project and collaborate with our business teams to ensure that we believe we are developing technology and products that are currently desired by the market and will result in future sales. In 2017, we expect to continue the trend of a decrease in the amount of research and development expense.
Losses on asset disposal and impairment
We experienced losses on asset disposals and impairments totaling $14.6 million and $1.8 million in 2015 and 2014, respectively. Losses on asset disposals and impairments in 2016 were primarily related to the $14.9 million non-cash impairment of the long-lived assets at B&W's one coal-fired power plant located in Ebensburg, Pennsylvania, which is classified separately in restructuring costs during 2016. The impairment charge recorded in 2015 was primarily related to research and development facilities and equipment dedicated to activities that were determined not to be commercially viable. The impairment charges recorded in 2014 were related to the cancellation of operations and maintenance services contracts.
Equity in income (loss) of investees
Our equity method investees include joint ventures in China and India, each of which manufactures boiler parts, and a joint venture in Australia that sells and services industrial equipment and other project-related joint ventures. We sold all of our interest in our Australian joint venture, HMA, on December 22, 2016 for $18.0 million, resulting in a gain of $8.3 million.
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Our interest in HMA's income before the gain on sale in 2016 was $2.2 million, $3.1 million and $3.6 million in the years ended December 31, 2016, 2015 and 2014, respectively.
In May 2014, we purchased the remaining outstanding equity of a joint venture coal-fired power plant in Ebensburg, Pennsylvania that was previously unconsolidated. Since that date, we have consolidated its results in our Power segment. Additionally, in the year ended December 31, 2014, we recognized income from a United States environmental project joint venture. The United States environmental project was substantially completed in 2014 and did not contribute equity income in 2015.
Equity in income from our unconsolidated joint ventures increased $16.7 million to $16.4 million of income in 2016 from a $0.2 million loss in 2015, primarily due to the gain on the sale of our interest in our Australian joint venture discussed above and the performance of our joint venture in China.
Equity in income from our unconsolidated joint ventures decreased $8.9 million to a loss of $0.2 million in 2015, as compared to income of $8.7 million in 2014 primarily due to adverse market conditions in China and Australia and start-up costs relating to a new manufacturing facility in India. Additionally, in 2014, we recognized income from a United States environmental project joint venture that was substantially complete in 2014 and did not contribute equity income in 2015.
Restructuring
2016 Restructuring activities
On June 28, 2016, we announced actions to restructure our power business in advance of significantly lower demand now projected for power generation from coal in the United States. The new organizational structure includes a redesigned work flow to provide an efficient, flexible organization that can adapt to the changing market conditions and volumes. The costs associated with the restructuring activities were $31.4 million in the year ended December 31, 2016, and were primarily related to employee severance of $14.1 million and non-cash impairment of the long-lived assets at B&W's one coal-fired power plant located in Ebensburg, Pennsylvania of $14.9 million. Other costs associated with the restructuring of $2.4 million are related to organizational realignment of personnel and processes and an increase in valuation allowances associated with our deferred tax assets (see Note 10). The 2016 restructuring activities are expected to allow our business to continue to serve the power market and maintain gross margins, despite the expected decline in volume as a result of the lower projected demand in the US coal-fired power generation market. These restructuring actions are primarily in the Power segment. We expect additional restructuring charges during 2017 of up to $6 million primarily related to office reconfiguration, other facilities costs, consulting and other activities related to the June 28, 2016 restructuring.
Pre-2016 Restructuring activities
In 2014, we started our current restructuring initiatives that included manufacturing facility consolidation and outsourcing as well as reductions in force, consulting and other costs. The total cost of these restructuring initiatives was approximately $50 million, of which we incurred $37.0 million and $11.7 million in 2016 and 2015, respectively. Included in total restructuring costs are non-cash charges related to accelerated depreciation and impairment, which were $15.0 million and $6.7 million in the years ended December 31, 2016 and 2015, respectively. We expect additional restructuring charges of up to $5 million primarily related to facility demolition and consolidation activities, which will take place during the first half of 2017.
Prior to contemplating the spin-off, beginning in 2012, our former Parent had also implemented restructuring activities to enhance competitiveness and to better position the combined company, BWC, for growth, improved profitability and to help offset increasingly competitive market conditions. These activities included operational and functional efficiency improvements, organizational design changes and manufacturing optimization that were substantially complete prior to the spin-off. A substantial part of these activities benefited us, primarily related to activities in 2014. A total of $21.5 million of costs associated with these previous restructuring activities were recognized through June 30, 2015, including $2.1 million in 2014. We have not recognized costs related to these prior restructuring activities since June 30, 2015.
Spin-off transaction costs
In the years ended December 31, 2016 and 2015, we incurred $3.8 million and $3.8 million of costs directly related to the spin-off of B&W from BWC, respectively, primarily related to retention stock awards that had a one-year vesting period as of the June 30, 2015 date of the spin-off.
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Mark to market adjustments for pension and other postretirement benefit plans
We recognize actuarial gains and losses for our pension and other postretirement benefit plans into earnings as a component of net periodic benefit cost, which affect both our cost of operations and SG&A. These MTM adjustments for our pension and other postretirement plans resulted in net losses of $24.1 million, $40.2 million and $101.3 million, in 2016, 2015 and 2014, respectively, and the effect on cost of operations and SG&A are detailed above and in Note 18 to the consolidated and combined financial statements included in Item 8. The MTM loss in 2016 was primarily related to a decrease in the discount rate used to measure our pension plan liabilities and changes in the demographics of our pension plan participants, partially offset by actual return on assets that exceeded our expected return for the year. The MTM loss in 2016 was partially offset by a curtailment gain in one of our other postretirement benefit plans. We terminated the Babcock & Wilcox Retiree Medical Plan (the "Retiree OPEB plan") effective December 31, 2016. The Retiree OPEB plan was originally established to provide secondary medical insurance coverage for retirees that had reached the age of 65, up to a lifetime maximum cost. In exchange for terminating the Retiree OPEB plan, the participants had the option to enroll in a third-party health care exchange, which B&W agreed to contribute up to $750 a year for each of the next three years (beginning in 2017), provided the plan participant had not yet reached his or her lifetime maximum under the terminated Retiree OPEB plan. Based on the number of participants who did not enroll in the new benefit plan, we recognized a settlement gain of $7.2 million on December 31, 2016 (which is included as part of the MTM adjustment). The net MTM loss in 2015 was primarily related to actual return on assets that fell short of the expected return, offset by an increase in the discount rate used to measure our benefit plans liabilities. The MTM loss in 2014 was primarily related to a $46.9 million loss recognized on the adoption of a new mortality assumption and a decline in the discount rate, offset by actual return on assets that exceeded the expected return.
Provision for income taxes
Year Ended December 31, | |||||||||||
(in thousands, except percentages) | 2016 | 2015 | 2014 | ||||||||
Income (loss) from continuing operations before provision for income taxes | $ | (108,139 | ) | $ | 20,205 | $ | (36,618 | ) | |||
Income tax provision | 6,943 | 3,671 | (24,728 | ) | |||||||
Effective tax rate | (6.4 | )% | 18.2 | % | 67.5 | % | |||||
We operate in numerous countries that have statutory tax rates below that of the United States federal statutory rate of 35%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 20% and approximately 30%. In addition, the jurisdictional mix of our income (loss) before tax can be significantly affected by MTM adjustments related to our pension and postretirement plans, which are primarily in the United States and the impact of discrete items.
In 2016, we had a pretax loss in the United States after MTM adjustments as well as an aggregate pretax loss in our foreign jurisdictions. In addition, some of the foreign losses were subject to a valuation allowance and therefore did not give rise to a tax benefit in 2016. Because the jurisdictional mix of our pretax loss was heavily skewed toward relatively low tax jurisdictions, a lower effective tax rate resulted. This low effective tax rate applied against our pretax loss was further reduced due to the impact of unfavorable discrete items recorded in 2016.
In 2015, the MTM adjustments resulted in a net loss in the United States, which was tax-effected at U.S. statutory tax rates. When these tax benefits, which are realized in a relatively high tax jurisdiction, are combined with the tax expense generated in foreign jurisdictions with relatively lower statutory tax rates, a low net effective tax rate resulted because we have income before the provision for income taxes.
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In 2014, the MTM adjustments resulted in a net loss in the United States that was partially offset by earnings in foreign jurisdictions. Under these circumstances, the relatively higher U.S. statutory tax rate combined with the lower tax rates applicable in foreign jurisdictions resulted in a relatively high effective tax rate because we have a loss before the provision for income taxes.
Income (loss) before provision for income taxes generated in the United States and foreign locations for the years ended December 31, 2016, 2015 and 2014 is presented in the table below.
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
United States | $ | 1,280 | $ | (20,748 | ) | $ | (64,084 | ) | |||
Other than the United States | (109,419 | ) | 40,953 | 27,466 | |||||||
Income (loss) before provision for (benefit from) income taxes | (108,139 | ) | 20,205 | (36,618 | ) | ||||||
As described above, in addition to jurisdictional mix of earnings and the impact of MTM adjustments, our income tax provision and our effective tax rate can also be affected by discrete items that do not occur in each period or jurisdiction and recurring items like foreign tax and research credits, nondeductible expenses and manufacturing tax benefits.
In 2016, we had net unfavorable discrete items of approximately $32.2 million. With a pretax loss in 2016, unfavorable discrete items decreased the effective tax rate by 29.8%. Our discrete items primarily consist of a $15.7 million increase in the valuation allowance against deferred tax assets related to one of our foreign businesses that incurred pretax losses in the current year, a $10.8 million increase in the valuation allowance against the deferred tax asset related to our equity investment in a foreign joint venture and a $5.1 million charge related to changes in state deferred taxes due to changes in tax rates and an increase in valuation allowances.
In 2015, we had net unfavorable discrete items of approximately $2.7 million, primarily related to revaluing our state deferred taxes, which increased the effective tax rate in 2015 by approximately 14%. The recurring items largely offset each other.
In 2014, we had net favorable discrete items of approximately $4.0 million primarily related to the receipt of a ruling from the United States Internal Revenue Service that enabled us to amend prior year United States income tax returns for 2010 to 2012 to exclude distributions of several of our foreign joint ventures from domestic taxable income. Because 2014 was a loss year, this benefit resulted in an increase to the effective tax rate of approximately 11%. In addition, the favorable impact of the foreign tax and research credits further increased our effective tax rate by approximately 8%.
Discrete items are dependent on future events that management is unable to reasonably forecast. Consequently, we cannot predict the amount or significance of such items on our effective tax rate in future periods.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2016, we had: unrestricted cash and cash equivalents of $95.9 million; investments with a fair value of $18.0 million, primarily held by our captive insurance company; and restricted cash and cash equivalents of $27.8 million, of which $6.6 million was held in restricted foreign cash accounts and $21.2 million was held to meet reinsurance reserve requirements of our captive insurer in lieu of long-term investments.
Of our $95.9 million of unrestricted cash and cash equivalents at December 31, 2016, approximately $94.4 million, or 98%, is held outside of the United States and relates to foreign operations, though it is primarily held in United States dollars to mitigate foreign exchange risk. In general, these resources are not available to fund our United States operations unless the funds are repatriated to the United States, which could expose us to taxes we presently have not accrued in our financial statements. We presently have no plans to repatriate these funds to the United States as the liquidity generated by our United States operations is sufficient to meet the cash requirements of our United States operations.
Our investment portfolio consists primarily of investments in highly liquid money market instruments. Our investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of tax, reported as a component of other comprehensive income (loss). Beginning in 2017, unrealized gains and losses, net of tax, will be reported
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in our statement of operations each period as a result of a change in accounting principles required by GAAP. The change in accounting will be reflected prospectively in our financial statements.
We continue to explore long-term growth strategies across our segments through acquisitions to expand and complement our existing businesses. We expect to fund these opportunities by cash on hand, external financing (including debt), equity or some combination thereof. We expect cash and cash equivalents, cash flows from operations, and our borrowing capacity to be sufficient to meet our liquidity needs for at least twelve months from the date of this filing.
Cash and cash equivalents decreased by $269.3 million in 2016. Our net cash provided by operations was $2.3 million in 2016, compared to cash provided by operations of $170.4 million in 2015. The decrease in cash provided by operations was primarily attributable to $124.6 million less of operating income in 2016 resulting from the status of contracts in progress in our Renewable segment and $20.4 million of cash disbursements associated with our restructuring activities. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position. Our existing portfolio of Renewable contracts include milestone payments from our customers in advance of incurring the contract expenses, and as a result we are in an advance bill position on most of our Renewable contracts at December 31, 2016. Because of this advanced bill position, combined with the increase in expected costs to complete the Renewable loss contracts, we expect this business segment to use a significant amount of cash during 2017.
Our net cash used in investing activities increased by $135.0 million to $180.8 million in 2016 from $45.9 million in 2015 primarily due to our acquisition of SPIG on July 1, 2016, and a $26.2 million contribution in April 2016 to increase our interest in TBWES, our joint venture in India. The equity contribution to our Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") joint venture was for the purpose of extinguishing the joint venture's high-interest third-party debt and avoiding the associated future interest cost. Capital expenditures in 2016 were $22.5 million, and we expect approximately the same level of capital expenditures in 2017.
Our net cash provided by (used for) financing activities was $(83.4) million in 2016, compared to $53.6 million in 2015. Net cash used for financing activities in 2016 includes our repurchase of $78.4 million of our common stock during the year pursuant to our share repurchase program, and net payments of $4.8 million on our revolving credit facilities, which includes our repayment of $18.3 million of SPIG's revolving debt during the third quarter of 2016. The net cash provided by financing activities in the year ended December 31, 2015 includes $80.6 million of cash received from the former Parent in the spin-off transaction, partially offset by $24.3 million used to repurchase 1.3 million shares in the second half of 2015.
United States credit facility
On June 30, 2015, we obtained a credit agreement ("Credit Agreement") in connection with the spin-off transaction. The Credit Agreement provides for a senior secured revolving credit facility in an aggregate amount of up to $600 million, which is scheduled to mature on June 30, 2020. The proceeds of loans under the Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit.
On February 24, 2017, we entered into Amendment No. 2 to Credit Agreement (the “Amendment” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (i) provide financial covenant relief by amending the definition of EBITDA (as defined in the Amended Credit Agreement) to exclude up to $98.1 million of losses for certain Renewable segment contracts for the year ended December 31, 2016; (ii) increase the maximum permitted leverage ratio to 3.50 to 1.00 during the covenant relief period; (iii) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to $300.0 million in the aggregate; (iv) increase the pricing for borrowings, letters of credit and commitment fees under the Amended Credit Agreement during the covenant relief period; (v) limit our ability to incur debt and liens during the covenant relief period; (vi) limit our ability to make acquisitions and investments in third parties during the covenant relief period; (vii) prohibit us from making dividends and stock repurchases during the covenant relief period; (viii) prohibit us from exercising the accordion described below during the covenant relief period; (ix) limit our financial letters of credit outstanding under the Amended Credit Agreement to $30.0 million during the covenant relief period; and (x) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales. The covenant relief period will end, at our election, when the conditions set forth in the Amendment are satisfied, but in no event earlier than the date on which we provide the compliance certificate for the fiscal quarter ending December 31, 2017.
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Other than during the covenant relief period described above, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (i) $200 million plus (ii) an unlimited amount, so long as for any commitment increase under this subclause (ii) our senior secured leverage ratio (assuming the full amount of any commitment increase under this subclause (ii) is drawn) is equal to or less than 2.0 to 1.0 after giving pro forma effect thereto. During the covenant relief period described above, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period described above, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments. Following the covenant relief period described above, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
Loans outstanding under the Amended Credit Agreement bear interest at our option at either (i) the LIBOR rate plus (a) during the covenant relief period described above, a margin of 2.50% per year, and (b) following the covenant relief period described above, a margin ranging from 1.375% to 1.875% per year, or (ii) the base rate (the highest of the Federal Funds rate plus 0.5%, the one month LIBOR rate plus 1.0%, or the administrative agent's prime rate) plus (a) during the covenant relief period described above, a margin of 1.50% per year, and (b) following the covenant relief period described above, a margin ranging from 0.375% to 0.875% per year. A commitment fee is charged on the unused portions of the revolving credit facility, and that fee (A) during the covenant relief period described above, is 0.50% per year, and (B) following the covenant relief period described above, varies between 0.25% and 0.35% per year. Additionally, (I) during the covenant relief period, a letter of credit fee of 2.50% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.50% per year is charged with respect to the amount of each performance letter of credit outstanding, and (II) following the covenant relief period described above, a letter of credit fee of between 1.375% and 1.875% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of between 0.825% and 1.125% per year is charged with respect to the amount of each performance letter of credit outstanding. Following the covenant relief period described above, the applicable margin for loans, the commitment fee and the letter of credit fees set forth above vary quarterly based on our leverage ratio.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio as defined in the Amended Credit Agreement (i) is 3.50 to 1.00 during the covenant relief period described above and (ii) is 3.00 to 1.00 following the covenant relief period described above (which ratio may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition). The minimum consolidated interest coverage ratio is 4.00 to 1.00 both during and following the covenant relief period described above. In addition, the Amended Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At December 31, 2016, usage under the Amended Credit Agreement consisted of $9.8 million in borrowings at an effective interest rate of 4.125%, $7.5 million of financial letters of credit and $89.1 million of performance letters of credit. After giving effect to the maximum leverage ratio, we had $228.8 million available borrowing capacity based on trailing-twelve month EBITDA, as defined in our Amended Credit Agreement, at December 31, 2016.
The Amended Credit Agreement generally includes customary events of default for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs under the Amended Credit Agreement, all obligations will immediately become due and payable. If any other event of default exists, the lenders will be permitted to accelerate the maturity of the obligations outstanding. If any event of default occurs, the lenders are permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. Additionally, if we are unable to make any of the representations and warranties in the Amended Credit Agreement, we will be unable to borrow funds or have letters of credit issued.
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Universal acquisition
In order to purchase Universal on January 11, 2017, we borrowed $55 million under the United States credit facility in 2017. The acquisition did not materially change the level of bank guarantees, letters of credit or surety bonds that were outstanding at December 31, 2016.
Foreign revolving credit facilities
Outside of the United States, we have unsecured revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. The revolving credit facilities in Turkey and India are a result of the July 1, 2016 acquisition of SPIG. These three foreign revolving credit facilities allow us to borrow up to $15.7 million in aggregate, and each have a one year term. At December 31, 2016, we had $14.2 million in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of 4.92%. If an event of default relating to bankruptcy or insolvency events was to occur, all obligations will become due and payable.
Letters of credit, bank guarantees and surety bonds
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States credit facility as of December 31, 2016 and December 31, 2015 was $255.2 million and $193.1 million, respectively. The increase in 2016 is attributable to the July 1, 2016 acquisition of SPIG.
We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of December 31, 2016, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $527.9 million.
Long-term benefit obligations
Our unfunded pension and postretirement benefit obligations totaled $300.8 million at December 31, 2016. These long-term liabilities are expected to require use of our resources to satisfy our future funding obligations. For the year ended December 31, 2016, we made required contributions to our pension plans totaling $4.0 million and to our postretirement plans of $3.0 million. In 2017, we expect to make $19 million to $21 million of contributions to our benefit plans. See additional information on our long-term benefit obligations in Note 18 to our consolidated and combined financial statements included in Item 8 of this annual report.
Contractual obligations
Our cash requirements as of December 31, 2016 under current contractual obligations were as follows:
(in thousands) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | ||||||||||||||
Operating lease payments | $ | 13,189 | $ | 5,224 | $ | 6,266 | $ | 1,664 | $ | 35 | |||||||||
US revolving credit facility | $ | 9,800 | $ | — | $ | 9,800 | $ | — | $ | — | |||||||||
Foreign revolving credit facility | $ | 14,241 | $ | 14,241 | $ | — | $ | — | $ | — | |||||||||
The table above excludes cash payments for self-insured claims, litigation and funding of our pension and postretirement benefit plans because we are uncertain as to the timing and amount of any associated cash payments that will be required. For example, expected pension contributions are subject to potential contributions that may be required in connection with acquisitions, dispositions or plan mergers. Also, estimated pension and other postretirement benefit payments are based on actuarial estimates using current assumptions for, among other things, discount rates, expected long-term rates of return on plan assets and health care costs. Additionally, the table above excludes deferred income taxes recorded on our balance sheets
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because cash payments for income taxes are determined primarily on future taxable income. Our only long-term debt at December 31, 2016 was our $9.8 million United States revolving credit facility balance.
Our contingent commitments under letters of credit, bank guarantees and surety bonds outstanding at December 31, 2016 expire as follows (in thousands):
Total | Less than 1 Year | 1-3 Years | 3-5 Years | Thereafter | |||||||||||
$913,248 | $ | 521,322 | $ | 326,674 | $ | 63,092 | $ | 2,160 | |||||||
We do not expect significant cash payments associated with the contingent commitments included in the table above because we expect to fulfill the performance commitments related to the underlying contracts.
Off-balance sheet arrangements
There were no significant off-balance sheet arrangements at December 31, 2016.
EFFECTS OF INFLATION AND CHANGING PRICES
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, using historical United States dollar accounting ("historical cost"). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the United States dollar, especially during times of significant and continued inflation.
In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. However, there can be no assurance we will be able to cover all changes in cost using this strategy.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe the following are our most critical accounting policies that we apply in the preparation of our financial statements. These policies require our most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Contracts and revenue recognition
We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs on a percentage-of-completion ("POC") method for individual contracts or combinations of contracts based on a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenues and resulting income based on costs incurred to date as a percentage of total estimated costs. 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. 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. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. We routinely review estimates related to our contracts, and revisions to profitability are reflected in the quarterly and annual earnings we report. For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed.
In the years ended December 31, 2016, 2015 and 2014, we recognized net changes in estimates related to long-term contracts accounted for on the POC basis which increased (decreased) operating income by $(106.8) million, $0.4 million and $26.3 million, respectively. As of December 31, 2016, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues in accordance with the percentage-of-completion method of accounting. However, it is possible that current estimates could change due to project performance or unforeseen events, which could result in adjustments to
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overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
We recognize income from contract change orders or claims when formally agreed with the customer. We regularly assess the collectability of contract revenues and receivables from customers. We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe the following accounting criteria have been met:
a) | The contract or other evidence provides a legal basis for the claim; or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim. |
b) | Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance. |
c) | Costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed. |
d) | The evidence supporting the claim is objective and verifiable, not based on unsupported representations. |
In our consolidated balance sheets, we had no accrued claims receivable at December 31, 2016 and $2.3 million of claims receivable at December 31, 2015.
Business combinations
We account for acquisitions in accordance with FASB Topic Business Combinations. This topic requires us to estimate the
fair value of assets acquired, liabilities assumed and interests transferred as a result of business combinations. It also provides
disclosure requirements to assist users of the financial statements in evaluating the nature and financial effects of business
combinations.
Several valuation methods are used to determine the fair value of the assets acquired and liabilities assumed. For intangible
assets, we used the income method, which required us to forecast the expected future net cash flows for each intangible asset.
These cash flows were then adjusted to present value by applying an appropriate discount rate that reflects the risk factors
associated with the projected cash flows. Some of the more significant estimates and assumptions inherent in the income
method include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows and the assessment of the asset's economic life and the competitive trends impacting the asset,
including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an
intangible asset also require judgment as different types of intangible assets will have different useful lives, or indefinite
useful lives.
We accounted for the acquisitions of SPIG and MEGTEC using the acquisition method. All of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. Acquisition-related costs were recorded as selling, general and administrative expenses in our condensed consolidated and combined financial statements.
Investments in unconsolidated affiliates
We use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%, unless significant economic or governance considerations indicate that we are unable to exert significant influence, in which case the cost method is used. The equity method is also used for affiliates in which our investment ownership is greater than 50% but we do not have a controlling interest. Currently, all of our material investments in affiliates that are not included in our consolidated and combined financial statements are recorded using the equity method. Our primary equity method investees include joint ventures in China, India and Australia. Affiliates in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost.
We assess our investments in unconsolidated affiliates for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other than temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated affiliate at fair value.
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At December 31, 2016, our total investment in equity method investees is $98.7 million, including a $40.6 million investment in a start-up venture in India, TBWES, that completed construction of its manufacturing facility intended primarily for new build coal boiler projects in India in 2014. While TBWES has not yet recorded a profit, we have determined that an other-than-temporary-impairment is not present based on the expected cash flows and strategy for TBWES. Continuing future losses or changes in the strategy of TBWES or other joint ventures could affect future assessments of other-than-temporary-impairment.
Pension and other postretirement benefit plans
We utilize actuarial and other assumptions in calculating the cost and benefit obligations of our pension and postretirement benefits. The assumptions utilized in the determination of our benefit cost and obligations include assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends. The assumptions utilized represent our best estimates based on historical experience and other factors.
Actual experience that differs from these assumptions or future changes in assumptions will affect our recognized benefit obligations and related costs. We recognize net actuarial gains and losses into earnings in the fourth quarter of each year, or as interim remeasurements are required, as a component of net periodic benefit cost. Net actuarial gains and losses occur when actual experience differs from any of the various assumptions used to value our pension and postretirement benefit plans or when assumptions, which are revisited annually through our update of our actuarial valuations, change due to current market conditions or underlying demographic changes. The primary factors contributing to net actuarial gains and losses are changes in the discount rate used to value the obligations as of the measurement date each year, the difference between the actual and expected return on plan assets and changes in health care cost trends. The effect of changes in the discount rate and expected rate of return on plan assets in combination with the actual return on plan assets can result in significant changes in our estimated pension and postretirement benefit cost and our consolidated and combined financial condition.
In 2016, we changed our approach to setting the discount rate from a single equivalent discount rate to an alternative spot rate method. This change in estimate was applied prospectively in developing our annual discount rate, which resulted in $6.8 million lower interest and service cost in 2016. The impact of the change in estimate did not change our pension and other postretirement benefits liability as of December 31, 2016, because any change was completely offset in the net actuarial gain (loss) recorded in the annual mark to market adjustment. This new method was adopted because it more accurately applies each year’s spot rates to the projected cash flows.
In 2014, we adjusted our mortality assumption to reflect mortality improvements identified by the Society of Actuaries, adjusted for our experience. The impact of the change in this assumption caused a $46.9 million increase in our pension liability.
The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets on our pension plan obligations and expense for the year ended December 31, 2016:
(In millions) | 0.25% increase | 0.25% decrease | |||||
Discount rate: | |||||||
Effect on ongoing net periodic benefit cost(1) | $ | (22.2 | ) | $ | 29.7 | ||
Effect on projected benefit obligation | (31.2 | ) | 32.5 | ||||
Return on assets: | |||||||
Effect on ongoing net periodic benefit cost | $ | (2.2 | ) | $ | 2.2 | ||
(1) Excludes effect of annual MTM adjustment.
A 25 basis point change in the assumed discount rate, return on assets and health care cost trend rate would have no meaningful impact on our other postretirement benefit plan obligations and expense for the year ended December 31, 2016 individually or in the aggregate, excluding the impact of any annual MTM adjustments we record annually.
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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. See Note 20 to the consolidated and combined financial statements included in Item 8 for a discussion of this litigation. As disclosed, we have accrued estimates of the probable losses associated with these matters; however, these matters are typically resolved over long periods of time and are often difficult to estimate due to the possibility of multiple actions by third parties. Therefore, it is possible that future earnings could be affected by changes in our estimates related to these matters.
Goodwill and long-lived asset impairment
Each year, we evaluate goodwill at each reporting unit to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative analysis when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant facts and circumstances that could affect fair value. Deterioration in macroeconomic, industry and market conditions, cost factors, overall financial performance, share price decline or entity and reporting unit specific events could cause us to believe a qualitative test is no longer appropriate.
When we determine that it is appropriate to test goodwill for impairment utilizing a quantitative test, the first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill. We utilize both the income and market valuation approaches to provide inputs into the estimate of the fair value of our reporting units, which would be considered by market participants.
Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. Actual results could differ materially from our projections. Some assumptions, such as future revenues, costs and changes in working capital are company driven and could be affected by a loss of one or more significant contracts or customers; failure to control costs on certain contracts; or a decline in demand based on changing economic, industry or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control.
Under the market valuation approach, we employ both the guideline publicly traded company method and the similar transactions method. The guideline publicly traded company method indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. The similar transactions method considers recent prices paid for business in our industry or related industries. After identifying and selecting guideline companies and similar transactions, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units. Assumptions include the selection of our peer companies and use of market multiples, which could deteriorate or increase based on the profitability of our competitors and performance of their stock, which is often dependent on the performance of the stock market and general economy as a whole.
Adverse changes in these assumptions utilized within the first step of our impairment test could cause a reduction or elimination of excess fair value over carrying value, resulting in potential recognition of impairment. 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.
Our annual goodwill impairment assessment is performed on October 1 of each year (the "annual assessment" date). Our 2016 annual assessment for each of our five reporting units indicated that we had no impairment of goodwill. The fair value of our reporting units were all in excess of carrying value on the assessment date by at least 20%. The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a 50% weighting of a discounted cash flow analysis under the income approach using forward-looking projections of estimated future operating results, a 30% weighting of a guideline company methodology under the market approach using revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, and a 20% weighting using the similar transactions methodology under the market approach using revenue and EBITDA multiples.
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The goodwill impairment test associated with our MEGTEC reporting unit is the most sensitive to a change in future valuation assumptions. The reporting unit has $104.3 million of goodwill, which is unchanged since June 30, 2015. As of the annual assessment date in 2016 and 2015, the fair value of our MEGTEC reporting unit exceeded its carrying value by 22% and 48%, respectively. The change in headroom was attributable to a decrease in the estimated fair value of the reporting unit from $182.8 million to $163.8 million as of our annual assessment date in 2015 and 2016, respectively, and a $11.5 million increase in the carrying value of the reporting unit. Under both the income and market valuation approaches, the independently obtained fair value estimates decreased due to lower projected net sales and EBITDA. Similar to many industrial businesses, the 2016 reduction in MEGTEC reporting unit revenues has been the result of a decline in new equipment demand, primarily in the Americas market. However, management believes the industrials market is starting to show signs of stabilizing.
The Renewable segment's fourth quarter results caused us to evaluate whether its goodwill was impaired at December 31, 2016. The Renewable segment has $48.4 million of goodwill at December 31, 2016. We estimated the fair value of the reporting unit at that date under Step 1 of the goodwill impairment test using a discounted cash flow analysis under the income approach. We determined there were not any significant changes in the results of our market valuation approach since the annual assessment date. Based on the results of the Step 1 impairment test at December 31, 2016, we determined it was not more likely than not that the segment's goodwill is impaired because the fair value of the Renewable reporting unit significantly exceeded its carrying value. We also assessed whether there was any indication of goodwill impairment in our other four reporting units at December 31, 2016, and have concluded based on our qualitative assessment that it is not more likely than not that the fair value is less than the carrying value.
We carry our property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business and result in future asset impairments.
In the year ended December 31, 2015, we recognized a $14.6 million impairment charge primarily related to research and development facilities and equipment dedicated to activities that were determined not to be commercially viable. The impairment is included in losses on asset disposals and impairments, net in our consolidated and combined financial statements included in Item 8 of this annual report.
In the year ended December 31, 2016, we recognized a $14.9 million impairment charge related primarily to the impairment of long-lived assets at B&W’s one coal-fired power plant located in Ebensburg, Pennsylvania. The impairment charge was determined as the difference between the fair value of the power plant's long-lived assets less the estimated cost to sell and the carrying value of the assets before recording the impairment charge.
The Renewable segment's fourth quarter results caused us to evaluate whether its long-lived assets were impaired. The Renewable segment is not an asset-intensive business, and at December 31, 2016 the segment had $55.3 million of noncurrent assets, $48.4 million of which was its goodwill balance. Based on our analysis, the estimated, undiscounted future cash flows exceed the carrying value of its long-lived assets, and accordingly we concluded there was no long-lived asset impairment at December 31, 2016.
Income taxes
Income tax expense for federal, foreign, state and local income taxes is 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
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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 consolidated and combined financial statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of the provision for income taxes in our consolidated and combined statements of operations.
Warranty
We accrue estimated expense included in cost of operations on our consolidated and combined statements of operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts. In addition, we record specific provisions or reductions when we expect the actual warranty costs to significantly differ from the accrued estimates. Factors that impact our estimate of warranty costs include prior history of warranty claims and our estimates of future costs of materials and labor. Such changes could have a material effect on our consolidated and combined financial condition, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents and our investment portfolio, which primarily consists of investments in United States Government obligations and highly liquid money market instruments denominated in United States dollars. We are averse to principal loss and seek to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investments are classified as available-for-sale.
We have no material future earnings or cash flow exposures from changes in interest rates on our long-term debt obligations. Our exposure to debt has been limited though December 31, 2016, but we financed $55 million of the January 11, 2017 purchase of Universal under our United Stated credit facility. Our United States credit facility has an interest rate that fluctuates with market rates, and as a result the fair value of debt has minimal exposure to fluctuations in interest rates.
We have operations in many foreign locations, and, as a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange ("FX") rates or weak economic conditions in those foreign markets. Our primary foreign currency exposures are Danish kroner, Great British pound, Euro, Canadian dollar, and Chinese yuan. In order to manage the risks associated with FX rate fluctuations, we attempt to hedge those risks with FX derivative instruments. Historically, we have hedged those risks with FX forward contracts. We do not enter into speculative derivative positions.
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Interest Rate Sensitivity
The following tables provide information about our financial instruments that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturity dates.
At December 31, 2016, Principal Amount by Expected Maturity | Fair Value at December 31, 2016 | ||||||||||||||||||
Years Ending December 31, | |||||||||||||||||||
(in thousands, except percentages) | 2017 | 2018 - 2022 | Thereafter | Total | |||||||||||||||
Investments | $ | 16,841 | $ | — | $ | 1,218 | $ | 18,059 | $ | 17,991 | |||||||||
Average interest rate | 0.81 | % | — | % | — | % | 0.75 | % | |||||||||||
Revolving debt | $ | 14,241 | $ | 9,800 | $ | — | $ | 24,041 | $ | 23,973 | |||||||||
Average interest rate | 4.9 | % | 4.1 | % | — | % | 4.6 | % | |||||||||||
At December 31, 2015, Principal Amount by Expected Maturity | Fair Value at December 31, 2015 | ||||||||||||||||||
Years Ending December 31, | |||||||||||||||||||
(in thousands, except percentages) | 2016 | 2017 - 2021 | Thereafter | Total | |||||||||||||||
Investments | $ | 3,996 | $ | — | $ | 1,172 | $ | 5,169 | $ | 5,089 | |||||||||
Average interest rate | 0.36 | % | — | % | — | % | 0.28 | % | |||||||||||
Revolving debt | $ | 2,005 | $ | — | $ | — | $ | 2,005 | $ | 2,014 | |||||||||
Average interest rate | 5.1 | % | — | % | — | % | 5.1 | % | |||||||||||
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Exchange Rate Sensitivity
The following table provides information about our FX forward contracts outstanding at December 31, 2016 and presents such information in United States dollar equivalents. The table presents notional amounts and related weighted-average FX rates by expected (contractual) maturity dates and constitutes a forward-looking statement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. The average contractual FX rates are expressed using market convention, which is dependent on the currencies being bought and sold under the forward contract.
Forward Contracts to Purchase Foreign Currencies in United States Dollars | ||||||||||
(in thousands) | Year Ending | Fair Value at | Average Contractual | |||||||
Foreign currency | December 31, 2017 | December 31, 2016 | Exchange Rate | |||||||
Canadian dollar (selling Australian dollar) | $ | 1,445 | $ | 56 | 1.0098 | |||||
Chinese renminbi, onshore (selling Euro) | $ | 3,892 | $ | 19 | 7.4644 | |||||
Danish krone (selling Swedish krona) | $ | 13,457 | $ | 107 | 1.3047 | |||||
Danish krone | $ | 18,693 | $ | (293 | ) | 6.8914 | ||||
Euro (selling Canadian dollar) | $ | 2,825 | $ | (9 | ) | 1.4369 | ||||
Euro (selling British pound sterling) | $ | 31,454 | $ | 3,425 | 0.7646 | |||||
Euro | $ | 23,600 | $ | (625 | ) | 1.0807 | ||||
British pound sterling (selling Euro) | $ | 1,260 | $ | (54 | ) | 0.8424 | ||||
British pound sterling | $ | 8,202 | $ | (203 | ) | 1.2605 | ||||
Swedish krona (selling Danish krone) | $ | 3,945 | $ | (75 | ) | 1.2836 | ||||
Swedish krona | $ | 1,036 | $ | 3 | 9.1660 | |||||
U.S. dollar (selling Canadian dollar) | $ | 17,560 | $ | 112 | 1.3397 | |||||
U.S. dollar (selling Euro) | $ | 16,018 | $ | 22 | 1.0518 | |||||
(in thousands) | Year Ending | Fair Value at | Average Contractual | |||||||
Foreign currency | December 31, 2018 | December 31, 2016 | Exchange Rate | |||||||
Danish krone (selling Swedish krona) | $ | 8,676 | $ | 257 | 1.3094 | |||||
Danish krone | $ | 6,552 | $ | (89 | ) | 6.7804 | ||||
Euro (selling British pound sterling) | $ | 1,629 | $ | 22 | 0.8550 | |||||
Euro | $ | 115 | $ | (7 | ) | 1.1360 | ||||
Swedish krona (selling Danish krone) | $ | 375 | $ | (7 | ) | 1.3064 | ||||
U.S. dollar (selling Canadian dollar) | $ | 1,818 | $ | 25 | 1.3233 | |||||
(in thousands) | Year Ending | Fair Value at | Average Contractual | |||||||
Foreign currency | December 31, 2019 | December 31, 2016 | Exchange Rate | |||||||
Danish krone (selling Swedish krona) | $ | 6,275 | $ | 362 | 1.3166 | |||||
Danish krone | $ | 8,590 | $ | (108 | ) | 6.5344 | ||||
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ITEM 8. Financial Statements and Supplemental Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Babcock & Wilcox Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Babcock & Wilcox Enterprises, Inc. (the "Company") as of December 31, 2016 and 2015, and the related consolidated and combined statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of Babcock & Wilcox Enterprises, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017, expressed an unqualified opinion on the Company’s internal control over financial reporting.
The Board of Directors of The Babcock & Wilcox Company (“BWC”) approved the spin-off of the Company through the distribution of common stock of the Company on June 30, 2015 to existing shareholders of BWC. See Note 1 to the consolidated and combined financial statements.
/S/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 28, 2017
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BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, | |||||||||||
(in thousands, except per share amounts) | 2016 | 2015 | 2014 | ||||||||
Revenues | $ | 1,578,263 | $ | 1,757,295 | $ | 1,486,029 | |||||
Costs and expenses: | |||||||||||
Cost of operations | 1,399,146 | 1,449,138 | 1,266,996 | ||||||||
Research and development costs | 10,406 | 16,543 | 18,483 | ||||||||
Losses (gains) on asset disposals and impairments, net | (32 | ) | 14,597 | 1,752 | |||||||
Selling, general and administrative expenses | 247,149 | 239,968 | 225,271 | ||||||||
Restructuring activities and spin-off transaction costs | 40,807 | 14,946 | 20,183 | ||||||||
Total costs and expenses | 1,697,476 | 1,735,192 | 1,532,685 | ||||||||
Equity in income (loss) of investees | 16,440 | (242 | ) | 8,681 | |||||||
Operating income (loss) | (102,773 | ) | 21,861 | (37,975 | ) | ||||||
Other income (expense): | |||||||||||
Interest income | 810 | 618 | 1,060 | ||||||||
Interest expense | (3,796 | ) | (1,059 | ) | (492 | ) | |||||
Other – net | (2,380 | ) | (1,215 | ) | 789 | ||||||
Total other income (expense) | (5,366 | ) | (1,656 | ) | 1,357 | ||||||
Income (loss) before income tax expense | (108,139 | ) | 20,205 | (36,618 | ) | ||||||
Income tax expense (benefit) | 6,943 | 3,671 | (24,728 | ) | |||||||
Income (loss) from continuing operations | (115,082 | ) | 16,534 | (11,890 | ) | ||||||
Income (loss) from discontinued operations, net of tax | — | 2,803 | (14,272 | ) | |||||||
Net income (loss) | (115,082 | ) | 19,337 | (26,162 | ) | ||||||
Net income attributable to noncontrolling interest | (567 | ) | (196 | ) | (366 | ) | |||||
Net income (loss) attributable to shareholders | $ | (115,649 | ) | $ | 19,141 | $ | (26,528 | ) | |||
Amounts attributable to shareholders: | |||||||||||
Income (loss) from continuing operations | $ | (115,649 | ) | $ | 16,338 | $ | (12,256 | ) | |||
Income (loss) from discontinued operations, net of tax | — | 2,803 | (14,272 | ) | |||||||
Net income (loss) attributable to shareholders | $ | (115,649 | ) | $ | 19,141 | $ | (26,528 | ) | |||
Basic earnings (loss) per share - continuing operations | $ | (2.31 | ) | $ | 0.31 | $ | (0.23 | ) | |||
Basic earnings per share - discontinued operations | — | 0.05 | (0.26 | ) | |||||||
Basic earnings (loss) per share | $ | (2.31 | ) | $ | 0.36 | $ | (0.49 | ) | |||
Diluted earnings (loss) per share - continuing operations | $ | (2.31 | ) | $ | 0.30 | $ | (0.23 | ) | |||
Diluted earnings per share - discontinued operations | — | 0.06 | (0.26 | ) | |||||||
Diluted earnings (loss) per share | $ | (2.31 | ) | $ | 0.36 | $ | (0.49 | ) | |||
Shares used in the computation of earnings per share: | |||||||||||
Basic | 50,129 | 53,487 | 54,239 | ||||||||
Diluted | 50,129 | 53,709 | 54,239 | ||||||||
See accompanying notes to consolidated and combined financial statements.
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BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Net income (loss) | $ | (115,082 | ) | $ | 19,337 | $ | (26,162 | ) | |||
Other comprehensive income (loss): | |||||||||||
Currency translation adjustments | (24,494 | ) | (19,459 | ) | (26,895 | ) | |||||
Derivative financial instruments: | |||||||||||
Unrealized gains (losses) on derivative financial instruments | 2,208 | 282 | (3,184 | ) | |||||||
Income taxes | 162 | (57 | ) | (824 | ) | ||||||
Unrealized gains on derivative financial instruments, net of taxes | 2,046 | 339 | (2,360 | ) | |||||||
Derivative financial instrument (gains) losses reclassified into net income | (3,598 | ) | 1,557 | 2,169 | |||||||
Income taxes | (568 | ) | 424 | 559 | |||||||
Reclassification adjustment for (gains) losses included in net income, net of taxes | (3,030 | ) | 1,133 | 1,610 | |||||||
Benefit obligations: | |||||||||||
Unrealized gains (losses) on benefit obligations | 12,202 | 462 | 2,719 | ||||||||
Income taxes | 4,510 | (57 | ) | (1,237 | ) | ||||||
Unrealized gains (losses) on benefit obligations, net of taxes | 7,692 | 519 | 3,956 | ||||||||
Amortization of benefit plan costs (benefits) | (254 | ) | 1,042 | 931 | |||||||
Income taxes | (404 | ) | 1,237 | 2,242 | |||||||
Amortization of benefit plan costs (benefits), net of taxes | 150 | (195 | ) | (1,311 | ) | ||||||
Investments: | |||||||||||
Unrealized gains (losses) on investments | 11 | (65 | ) | (2 | ) | ||||||
Income taxes | 4 | (16 | ) | — | |||||||
Unrealized gains (losses) on investments, net of taxes | 7 | (49 | ) | (2 | ) | ||||||
Investment gains reclassified into net income | — | 42 | |||||||||
Income taxes | — | 15 | — | ||||||||
Reclassification adjustments for losses included in net income, net of taxes | — | 27 | — | ||||||||
Other comprehensive income (loss) | (17,629 | ) | (17,685 | ) | (25,002 | ) | |||||
Total comprehensive income (loss) | (132,711 | ) | 1,652 | (51,164 | ) | ||||||
Comprehensive loss attributable to noncontrolling interest | (575 | ) | (183 | ) | (329 | ) | |||||
Comprehensive income (loss) attributable to shareholders | $ | (133,286 | ) | $ | 1,469 | $ | (51,493 | ) | |||
See accompanying notes to consolidated and combined financial statements.
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BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount) | December 31, 2016 | December 31, 2015 | |||||
Cash and cash equivalents | $ | 95,887 | $ | 365,192 | |||
Restricted cash and cash equivalents | 27,770 | 37,144 | |||||
Accounts receivable – trade, net | 282,347 | 291,242 | |||||
Accounts receivable – other | 73,756 | 44,765 | |||||
Contracts in progress | 166,010 | 128,174 | |||||
Inventories | 85,807 | 90,119 | |||||
Other current assets | 45,957 | 21,548 | |||||
Total current assets | 777,534 | 978,184 | |||||
Property, plant and equipment - gross | 332,537 | 330,021 | |||||
Accumulated depreciation | (198,900 | ) | (184,304 | ) | |||
Net property, plant and equipment | 133,637 | 145,717 | |||||
Goodwill | 267,395 | 201,069 | |||||
Deferred income taxes | 163,388 | 190,656 | |||||
Investments in unconsolidated affiliates | 98,682 | 92,196 | |||||
Intangible assets | 71,039 | 37,844 | |||||
Other assets | 17,468 | 17,379 | |||||
Total assets | $ | 1,529,143 | $ | 1,663,045 | |||
Revolving debt | $ | 14,241 | $ | 2,005 | |||
Accounts payable | 220,737 | 175,170 | |||||
Accrued employee benefits | 35,497 | 51,476 | |||||
Advance billings on contracts | 210,642 | 229,390 | |||||
Accrued warranty expense | 40,467 | 39,847 | |||||
Other accrued liabilities | 95,954 | 63,464 | |||||
Total current liabilities | 617,538 | 561,352 | |||||
Accumulated postretirement benefit obligations | 12,822 | 27,768 | |||||
Pension liabilities | 288,437 | 282,133 | |||||
Other noncurrent liabilities | 49,395 | 43,365 | |||||
Total liabilities | 968,192 | 914,618 | |||||
Commitments and contingencies | |||||||
Stockholders' equity: | |||||||
Common stock, par value $0.01 per share, authorized 200,000 shares; issued 48,688 and 52,481 shares at December 31, 2016 and 2015, respectively | 544 | 540 | |||||
Capital in excess of par value | 806,589 | 790,464 | |||||
Treasury stock at cost, 5,592 and 1,376 shares at December 31, 2016 and December 31, 2015, respectively | (103,818 | ) | (25,408 | ) | |||
Retained earnings (deficit) | (114,684 | ) | 965 | ||||
Accumulated other comprehensive loss | (36,482 | ) | (18,853 | ) | |||
Stockholders' equity attributable to shareholders | 552,149 | 747,708 | |||||
Noncontrolling interest | 8,802 | 719 | |||||
Total stockholders' equity | 560,951 | 748,427 | |||||
Total liabilities and stockholders' equity | $ | 1,529,143 | $ | 1,663,045 | |||
See accompanying notes to consolidated and combined financial statements.
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BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
Capital In Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Former Parent Investment | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||
Shares | Par Value | |||||||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||||||||
Balance December 31, 2013 | — | $ | — | $ | — | $ | — | $ | — | $ | 35,339 | $ | 489,381 | $ | 924 | $ | 525,644 | |||||||||
Net income | — | — | — | — | — | — | (26,528 | ) | 366 | (26,162 | ) | |||||||||||||||
Currency translation adjustments | — | — | — | — | — | (26,858 | ) | — | (37 | ) | (26,895 | ) | ||||||||||||||
Derivative financial instruments | — | — | — | — | — | (750 | ) | — | — | (750 | ) | |||||||||||||||
Defined benefit obligations | — | — | — | — | — | 2,645 | — | — | 2,645 | |||||||||||||||||
Available-for-sale investments | — | — | — | — | — | (2 | ) | — | — | (2 | ) | |||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 108 | — | 108 | |||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | — | (226 | ) | (226 | ) | |||||||||||||||
Net transfers from Parent | — | — | — | — | — | — | 213,075 | — | 213,075 | |||||||||||||||||
Balance December 31, 2014 | — | $ | — | $ | — | $ | — | $ | — | $ | 10,374 | $ | 676,036 | $ | 1,027 | $ | 687,437 | |||||||||
Net income | — | $ | — | $ | — | $ | — | $ | 965 | $ | — | $ | 18,176 | $ | 196 | $ | 19,337 | |||||||||
Currency translation adjustments | — | — | — | — | — | (19,446 | ) | — | (13 | ) | (19,459 | ) | ||||||||||||||
Derivative financial instruments | — | — | — | — | — | 1,472 | — | — | 1,472 | |||||||||||||||||
Defined benefit obligations | — | — | — | — | — | 324 | — | — | 324 | |||||||||||||||||
Available-for-sale investments | — | — | — | — | — | (22 | ) | — | — | (22 | ) | |||||||||||||||
Stock-based compensation | 137 | 17 | 7,772 | (1,143 | ) | — | — | 6 | — | 6,652 | ||||||||||||||||
Repurchased shares | (1,376 | ) | (14 | ) | (24,265 | ) | — | — | — | (24,279 | ) | |||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | — | (491 | ) | (491 | ) | |||||||||||||||
Net transfers from Parent | — | — | — | — | — | — | 125,295 | — | 125,295 | |||||||||||||||||
Distribution of Nuclear Energy segment to former Parent | — | — | — | — | — | (11,555 | ) | (36,284 | ) | — | (47,839 | ) | ||||||||||||||
Reclassification of former Parent investment to capital in excess of par value and common stock | 53,720 | 537 | 782,692 | — | — | — | (783,229 | ) | — | — | ||||||||||||||||
Balance December 31, 2015 | 52,481 | $ | 540 | $ | 790,464 | $ | (25,408 | ) | $ | 965 | $ | (18,853 | ) | $ | — | $ | 719 | $ | 748,427 | |||||||
Net income | — | $ | — | $ | — | $ | — | $ | (115,649 | ) | $ | — | $ | — | $ | 567 | $ | (115,082 | ) | |||||||
Currency translation adjustments | — | — | — | — | — | (24,494 | ) | — | 8 | (24,486 | ) | |||||||||||||||
Derivative financial instruments | — | — | — | — | — | (984 | ) | — | — | (984 | ) | |||||||||||||||
Defined benefit obligations | — | — | — | — | — | 7,842 | — | — | 7,842 | |||||||||||||||||
SPIG Acquisition | — | — | — | — | — | — | — | 7,754 | 7,754 | |||||||||||||||||
Available-for-sale investments | — | — | — | — | — | 7 | — | — | 7 | |||||||||||||||||
Stock-based compensation charges | 423 | 46 | 16,125 | (2,731 | ) | — | — | — | — | 13,440 | ||||||||||||||||
Repurchased shares | (4,216 | ) | (42 | ) | — | (75,679 | ) | — | — | — | — | (75,721 | ) | |||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | — | (246 | ) | (246 | ) | |||||||||||||||
December 31, 2016 | 48,688 | $ | 544 | $ | 806,589 | $ | (103,818 | ) | $ | (114,684 | ) | $ | (36,482 | ) | $ | — | $ | 8,802 | $ | 560,951 | ||||||
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BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (115,082 | ) | $ | 19,337 | $ | (26,162 | ) | |||
Non-cash items included in net income (loss): | |||||||||||
Depreciation and amortization | 39,583 | 34,932 | 32,436 | ||||||||
Debt issuance cost amortization | 1,244 | 622 | — | ||||||||
(Income) loss of equity method investees | (16,440 | ) | 242 | 8,743 | |||||||
Losses on asset disposals and impairments | 14,938 | 16,881 | 5,989 | ||||||||
Write-off of accrued claims receivable, net | — | 7,832 | — | ||||||||
Provision for (benefit from) deferred taxes | (9,000 | ) | (32,121 | ) | (42,023 | ) | |||||
Recognition of losses for pension and postretirement plans | 36,346 | 40,611 | 101,792 | ||||||||
Stock-based compensation charges | 16,129 | 7,773 | (11 | ) | |||||||
Changes in assets and liabilities, net of effects of acquisition: | |||||||||||
Accounts receivable | 58,915 | (33,977 | ) | (13,797 | ) | ||||||
Accrued insurance receivable | (15,000 | ) | — | — | |||||||
Contracts in progress and advance billings on contracts | (13,259 | ) | 62,971 | (8,860 | ) | ||||||
Inventories | 2,869 | 6,060 | (99,192 | ) | |||||||
Income taxes | 22,593 | 9,275 | 4,309 | ||||||||
Accounts payable | 4,542 | 17,863 | 10,123 | ||||||||
Accrued and other current liabilities | 25,110 | 11,464 | 9,660 | ||||||||
Pension liabilities, accrued postretirement benefits and employee benefits | (46,973 | ) | (2,336 | ) | (17,259 | ) | |||||
Other, net | (4,242 | ) | 2,970 | 10,028 | |||||||
Net cash from operating activities | 2,273 | 170,399 | (24,224 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Decrease in restricted cash and cash equivalents | 9,374 | 6,298 | (5,646 | ) | |||||||
Purchase of property, plant and equipment | (22,450 | ) | (35,397 | ) | (15,475 | ) | |||||
Acquisition of businesses, net of cash acquired | (144,780 | ) | — | (127,705 | ) | ||||||
Proceeds from sale of equity method investment in a joint venture | 17,995 | — | — | ||||||||
Investment in equity method investees | (26,256 | ) | (7,424 | ) | (4,900 | ) | |||||
Purchases of available-for-sale securities | (45,217 | ) | (14,008 | ) | (4,450 | ) | |||||
Sales and maturities of available-for-sale securities | 29,846 | 5,266 | 10,118 | ||||||||
Other | 646 | (587 | ) | (573 | ) | ||||||
Net cash from investing activities | (180,842 | ) | (45,852 | ) | (148,631 | ) | |||||
Cash flows from financing activities: | |||||||||||
Borrowings under our U.S. revolving credit facility | 205,600 | — | — | ||||||||
Repayments of our U.S. revolving credit facility | (195,800 | ) | — | — | |||||||
Borrowings under our foreign revolving credit facilities | 5,674 | — | — | ||||||||
Repayments of our foreign revolving credit facilities | (20,248 | ) | (1,080 | ) | (4,538 | ) | |||||
Payment of debt issuance costs | — | — | 2,967 | ||||||||
Net transfers from our former Parent | — | 80,589 | 213,137 | ||||||||
Repurchase of shares of our common stock | (78,410 | ) | (25,408 | ) | — | ||||||
Other | (246 | ) | (491 | ) | 100 | ||||||
Net cash from financing activities | (83,430 | ) | 53,610 | 211,666 | |||||||
Effects of exchange rate changes on cash | (7,306 | ) | (6,407 | ) | (12,573 | ) | |||||
Cash flow from continuing operations | (269,305 | ) | 171,750 | 26,238 | |||||||
Cash flows from discontinued operations: | |||||||||||
Operating cash flows from discontinued operations, net | — | (25,194 | ) | (191 | ) | ||||||
Investing cash flows from discontinued operations, net | — | (23 | ) | (1,729 | ) | ||||||
Effects of exchange rate changes on cash | — | — | 3,023 | ||||||||
Net cash flows from discontinued operations | — | (25,217 | ) | 1,103 | |||||||
Net increase (decrease) in cash and equivalents | (269,305 | ) | 146,533 | 27,341 | |||||||
Cash and equivalents, beginning of period | 365,192 | 218,659 | 191,318 | ||||||||
Cash and equivalents, end of period | $ | 95,887 | $ | 365,192 | $ | 218,659 | |||||
See accompanying notes to consolidated and combined financial statements.
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BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2016
NOTE 1 – BASIS OF PRESENTATION
Babcock & Wilcox Enterprises, Inc. ("B&W", "we", "us" or "our") operates in three business segments 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.
We have presented our 2016 consolidated financial statements and our 2015 and 2014 consolidated and combined financial statements in United States 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 present the notes to our financial statements on the basis of continuing operations, unless otherwise stated.
On June 8, 2015, BWC's board of directors approved the spin-off of B&W through the distribution of shares of B&W common stock to holders of BWC common stock (the "spin-off"). On June 30, 2015, B&W became a separate publicly-traded company, and BWC did not retain any ownership interest in B&W. On and prior to June 30, 2015 our 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 in connection with the spin-off by BWC to B&W. In addition, BW PGG also included certain assets and liabilities of BWC's Nuclear Energy ("NE") segment that were transferred to BWC. We have treated the assets, liabilities, operating results and cash flows of the NE business as a discontinued operation in our consolidated and combined financial statements. See Note 26 for further information.
Through June 30, 2015, 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 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 spin-off from BWC, we have been performing these functions using internal resources or purchased services, certain of which have been provided by BWC pursuant to a transition services agreement. Refer to Note 25 for a detailed description of transactions with other affiliates of BWC.
Our consolidated financial statements through December 31, 2016 exclude the results of Universal Acoustic & Emission Technologies, Inc. ("Universal"), which we acquired on January 11, 2017. See Note 30 to for additional information.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Reportable segments
We operate in three reportable segments. Our reportable segments are as follows:
• | Power segment: Focused on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. |
• | Renewable segment: Focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. |
• | Industrial segment: Focused on custom-engineered cooling, environmental, and other industrial equipment along with related aftermarket services. |
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For financial information about our segments see Note 5 to our consolidated and combined financial statements.
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, 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 investments, primarily highly liquid money market instruments, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss). 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 in our consolidated and combined statements of operations. 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 United States dollars at current exchange rates, and we translate items in our statement of operations 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 (loss). We report foreign currency transaction gains and losses in income. We have included in other - net transaction gains (losses) of $(5.4) million, $(0.1) million and $1.8 million in the years ended December 31, 2016, 2015 and 2014, 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 contract loss is recognized in full in the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in other current liabilities in the balance sheet. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions,
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we recognize the estimated liquidated damages we will incur and record them as a reduction of revenue in the period the change in estimate occurs.
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.
As of December 31, 2016, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues in accordance with the percentage-of-completion method of accounting. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe the following accounting criteria have been met:
a) | The contract or other evidence provides a legal basis for the claim; or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim. |
b) | Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance. |
c) | Costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed. |
d) | The evidence supporting the claim is objective and verifiable, not based on unsupported representations. |
Warranty expense
We accrue estimated expense included in cost of operations on our consolidated and combined statements of operations to satisfy contractual warranty requirements when we recognize the associated revenues 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.
Research and development
Our research and development activities are related to the development and improvement of new and existing products, services and equipment. Research and development activities totaled $10.4 million, $16.5 million and $18.5 million in the years ended December 31, 2016, 2015 and 2014, respectively.
In the twelve months ended December 31, 2015, we recognized a $14.6 million impairment charge primarily related to research and development facilities and equipment dedicated to activities that were determined not to be commercially viable. The impairment is included in losses on asset disposals and impairments in the consolidated and combined statements of operations.
Pension plans and postretirement benefits
We sponsor various defined benefit pension and postretirement plans covering certain employees of our United States 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
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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. In 2016, we changed our approach to developing the discount rate from a single equivalent discount rate to an alternative spot rate method. This new method was adopted because it more accurately applies each year’s spot rates to the projected cash flows. This change in estimate was applied prospectively in developing our annual discount rate, which resulted in a lower interest and service cost during 2016.
In 2014, we adjusted our mortality assumption to reflect mortality improvements identified by the Society of Actuaries, adjusted for our experience. The impact of the change in this assumption caused a $46.9 million increase in our pension liability. 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.
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 recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost (mark to market adjustment). 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. See Note 18 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 and combined statements of operations.
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.
Trade accounts receivable and allowance for doubtful accounts
Our trade accounts receivable balance is stated at the amount owed by our customers, net of allowances for estimated uncollectible balances. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management’s evaluation of the ability of customers to make payments, with emphasis on historical remittance experience, known customer financial difficulties and the age of receivable balances. Accounts receivable are charged to the allowance when it is determined they are no longer collectible. Our allowance for doubtful accounts was $9.4 million and $6.3 million at December 31, 2016 and 2015, respectively. Amounts charged to selling, general and administrative expenses or deducted from the allowance were not significant to our statement of operations in the years ended December 31, 2016, 2015 and 2014.
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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 segment, for which we use the last-in, first-out ("LIFO") method. We determined the cost of approximately 18% and 20% of our total inventories using the LIFO method at December 31, 2016 and 2015, respectively, and our total LIFO reserve at December 31, 2016 and 2015 was approximately $7.0 million and $7.7 million, respectively. The components of inventories can be found in Note 13.
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 $19.7 million, $23.5 million and $22.3 million for the years ended December 31, 2016, 2015 and 2014, 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.
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.
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.
Derivative financial instruments
Our global operations expose us to 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.
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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 (loss) 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 and combined statements of operations. 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 and combined statements of operations.
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 $24.1 million at each of the years ended December 31, 2016 and 2015.
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 20. 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 Financial Accounting Standards Board ("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, 2016 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.
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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
During the year ended December 31, 2016, we adopted ASU 2015-16, Business Combinations (Topic 850), Simplifying the Accounting for Measurement-Period Adjustments, which simplified the accounting for adjustments made to provisional amounts during the measurement period as part of a business combination. United States GAAP previously required the acquirer in a business combination retrospectively adjust the provisional amounts recognized at the acquisition date during a measurement period. With this new standard, retrospective adjustments to provisional purchase price allocations are no longer be required. In the accompanying consolidated and combined financial statements, adjustments to the provisional SPIG S.p.A. purchase price allocation at September 30, 2016 were reflected in the financial statements as of December 31, 2016.
On December 31, 2016, we adopted ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. With this new standard, we are required to determine every interim and annual period whether conditions or events exist that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. If we indicate that it is probable B&W will not be able to meet its obligations as they become due within the assessment period, then we must evaluate whether it is probable that plans to mitigate those factors will alleviate that substantial doubt. Based on our going concern evaluation, we believe it is probable that B&W will be able to meet its obligations as they become due within one year after February 28, 2017.
NOTE 3 – EARNINGS PER SHARE
On June 30, 2015, 53,719,878 shares of our common stock were distributed to BWC shareholders to complete our spin-off transaction. The basic and diluted weighted average shares outstanding were based on the weighted average number of BWC common shares outstanding for the period ending June 30, 2015, adjusted for a distribution ratio of one share of B&W common stock for every two shares of BWC common stock.
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The following table sets forth the computation of basic and diluted earnings per share of our common stock:
Year Ended December 31, | |||||||||||
(in thousands, except per share amounts) | 2016 | 2015 | 2014 | ||||||||
Income (loss) from continuing operations | $ | (115,649 | ) | $ | 16,338 | $ | (12,256 | ) | |||
Income (loss) from discontinued operations, net of tax | — | 2,803 | (14,272 | ) | |||||||
Net income (loss) attributable to shareholders | $ | (115,649 | ) | $ | 19,141 | $ | (26,528 | ) | |||
Weighted average shares used to calculate basic earnings per share | 50,129 | 53,487 | 54,239 | ||||||||
Dilutive effect of stock options, restricted stock and performance shares (1) | — | 222 | — | ||||||||
Weighted average shares used to calculate diluted earnings per share | 50,129 | 53,709 | 54,239 | ||||||||
Basic earnings (loss) per share: | |||||||||||
Continuing operations | $ | (2.31 | ) | $ | 0.31 | $ | (0.23 | ) | |||
Discontinued operations | — | 0.05 | (0.26 | ) | |||||||
Basic earnings (loss) per share | $ | (2.31 | ) | $ | 0.36 | $ | (0.49 | ) | |||
Diluted earnings (loss) per share: | |||||||||||
Continuing operations | $ | (2.31 | ) | $ | 0.30 | $ | (0.23 | ) | |||
Discontinued operations | — | 0.06 | (0.26 | ) | |||||||
Diluted earnings (loss) per share | $ | (2.31 | ) | $ | 0.36 | $ | (0.49 | ) | |||
(1) Because we incurred a net loss in 2016, basic and diluted shares are the same. If we had net income in 2016, diluted shares would include an additional 0.5 million shares, and would exclude 3.4 million shares related to stock options because their effect would have been anti-dilutive. At December 31, 2015, we excluded from the diluted share calculation 1.3 million shares related to stock options, as their effect would have been anti-dilutive.
NOTE 4 – SPIG ACQUISITION
On July 1, 2016, we acquired all of the outstanding stock of SPIG S.p.A. ("SPIG") for €155 million (approximately $172.1 million) in an all-cash transaction, which was subject to post-closing adjustments. During September 2016, €2.6 million (approximately $2.9 million) of the transaction price was returned to B&W based on the difference between the actual working capital and pre-close estimates. Transaction costs included in the purchase price associated with closing the acquisition of SPIG on July 1, 2016 were approximately $0.3 million.
Based in Arona, Italy, SPIG is a global provider of custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. The acquisition of SPIG is consistent with B&W's goal to grow and diversify its technology-based offerings with new products and services in the industrial markets that are complementary to our core businesses. In the year ended December 31, 2016, SPIG contributed $96.3 million of revenue and $7.8 million of gross profit to the Industrial segment.
We accounted for the SPIG acquisition using the acquisition method. All of the assets acquired and liabilities assumed were recognized at their estimated fair value as of the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. Several valuation methods were used to determine the fair value of the assets acquired and liabilities assumed. For intangible assets, we used the income method, which required us to forecast the expected future net cash flows for each intangible asset. These cash flows were then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the projected cash flows. Some of the more significant estimates and assumptions inherent in the income method include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset's economic life and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory or
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economic barriers to entry. Determining the useful life of an intangible asset also required judgment as different types of intangible assets will have different useful lives, or indefinite useful lives.
The allocation of the purchase price, based on the estimated fair value of assets acquired and liabilities assumed, is detailed below.
(in thousands) | Estimated Acquisition Date Fair Value | ||
Cash | $ | 25,994 | |
Accounts receivable | 58,843 | ||
Contracts in progress | 61,155 | ||
Inventories | 2,554 | ||
Other assets | 7,341 | ||
Property, plant and equipment | 6,104 | ||
Goodwill | 72,401 | ||
Identifiable intangible assets | 55,164 | ||
Deferred income tax assets | 5,550 | ||
Revolving debt | (27,530 | ) | |
Current liabilities | (56,323 | ) | |
Advance billings on contracts | (15,226 | ) | |
Other noncurrent liabilities | (379 | ) | |
Deferred income tax liabilities | (17,120 | ) | |
Noncontrolling interest in joint venture | (7,754 | ) | |
Net acquisition cost | $ | 170,774 | |
We finalized the purchase price allocation as of December 31, 2016, which resulted in a $2.5 million increase in goodwill. The goodwill arising from the purchase price allocation of the SPIG acquisition is believed to be a result of the synergies created from combining its operations with B&W's, and the growth it can provide from its wide scope of engineered cooling and service offerings and customer base. None of this goodwill is expected to be deductible for tax purposes.
The intangible assets included above consist of the following (dollar amount in thousands):
(in thousands) | Estimated Fair Value | Weighted Average Estimated Useful Life (in Years) | |||
Customer relationships | $ | 12,217 | 9 | ||
Backlog | 17,769 | 2 | |||
Trade names / trademarks | 8,885 | 20 | |||
Technology | 14,438 | 10 | |||
Non-compete agreements | 1,666 | 3 | |||
Internally-developed software | 189 | 3 | |||
Total amortizable intangible assets | $ | 55,164 | |||
The acquisition of SPIG added $13.3 million of intangible asset amortization expense during the year ended December 31, 2016. Amortization of intangible assets is not allocated to segment results.
Approximately $3.5 million of acquisition and integration related costs of SPIG was recorded as selling, general and administrative expenses in the consolidated and combined statement of operations for the year ended December 31, 2016, respectively.
The following unaudited pro forma financial information below represents our results of operations for years ended December 31, 2016 and 2015 had the SPIG acquisition occurred on January 1, 2015. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the
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acquisition at January 1, 2015. This information should not be taken as representative of our future consolidated results of operations.
Year Ended December 31, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Revenues | $ | 1,663,126 | $ | 1,941,987 | ||||
Net income (loss) attributable to B&W | (111,500 | ) | 12,047 | |||||
Basic earnings per common share | (2.22 | ) | 0.23 | |||||
Diluted earnings per common share | (2.22 | ) | 0.22 | |||||
The unaudited pro forma results included in the table above reflect the following pre-tax adjustments to our historical results:
• | A net increase (decrease) in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of $6.5 million and $18.6 million in the years ended December 31, 2016 and 2015, respectively. |
• | Elimination of the historical interest expense recognized by SPIG of $0.5 million and $0.7 million in the years ended ended December 31, 2016 and 2015, respectively. |
• | Elimination of $3.5 million and $0.2 million in transaction related costs recognized in the years ended December 31, 2016 and 2015, respectively. |
NOTE 5 – SEGMENT REPORTING
Our operations are assessed based on three reportable segments, which changed beginning in the third quarter of 2016 with the purchase of SPIG as described in Note 4. Segment results for prior periods have been restated for comparative purposes.
• | Power segment: Focused on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. |
• | Renewable segment: Focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. |
• | Industrial segment: Focused on custom-engineered cooling, environmental, and other industrial equipment along with related aftermarket services. |
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An analysis of our operations by segment is as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
REVENUES | |||||||||||
Power segment | |||||||||||
Retrofits & continuous emissions monitoring systems | $ | 392,854 | $ | 427,378 | $ | 323,623 | |||||
New build utility and environmental | 292,302 | 403,981 | 343,956 | ||||||||
Aftermarket parts and field engineering services | 292,535 | 304,923 | 349,398 | ||||||||
Industrial steam generation | 107,267 | 219,379 | 208,229 | ||||||||
Eliminations | (109,480 | ) | (120,664 | ) | (68,627 | ) | |||||
975,478 | 1,234,997 | 1,156,579 | |||||||||
Renewable segment | |||||||||||
Renewable new build and services | 284,684 | 277,326 | 171,004 | ||||||||
Operations and maintenance | 65,814 | 63,437 | 57,977 | ||||||||
Eliminations | (1,326 | ) | (2,160 | ) | (4,949 | ) | |||||
349,172 | 338,603 | 224,032 | |||||||||
Industrial segment | |||||||||||
Industrial aftermarket parts and services | 81,690 | 61,350 | 35,290 | ||||||||
Environmental solutions | 74,726 | 90,343 | 48,938 | ||||||||
Cooling systems | 73,797 | — | — | ||||||||
Engineered products | 23,400 | 32,002 | 21,190 | ||||||||
253,613 | 183,695 | 105,418 | |||||||||
$ | 1,578,263 | $ | 1,757,295 | $ | 1,486,029 | ||||||
The segment information presented in the table above reflects the product line revenues that are reviewed by each segment's manager. These gross product line revenues exclude any eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Power segment elimination is revenue associated with construction services.
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
GROSS PROFIT: | |||||||||||
Power segment | $ | 233,550 | $ | 247,632 | $ | 237,491 | |||||
Renewable segment | (68,109 | ) | 57,682 | 53,449 | |||||||
Industrial segment | 50,726 | 54,826 | 30,400 | ||||||||
Intangible asset amortization expense included in cost of operations | (15,842 | ) | (7,676 | ) | (7,501 | ) | |||||
Mark to market loss included in cost of operations | (21,208 | ) | (44,307 | ) | (94,806 | ) | |||||
179,117 | 308,157 | 219,033 | |||||||||
Selling, general and administrative expenses | (240,166 | ) | (240,296 | ) | (215,379 | ) | |||||
Restructuring activities and spin-off transaction costs | (40,807 | ) | (14,946 | ) | (20,183 | ) | |||||
Equity in income (loss) of investees | 16,440 | (242 | ) | 8,681 | |||||||
Research and development costs | (10,406 | ) | (16,543 | ) | (18,483 | ) | |||||
Intangible asset amortization expense included in SG&A | (4,081 | ) | (3,769 | ) | (2,659 | ) | |||||
Mark to market (loss) gain included in SG&A | (2,902 | ) | 4,097 | (7,233 | ) | ||||||
Gains (losses) on asset disposals and impairments, net | 32 | (14,597 | ) | (1,752 | ) | ||||||
Operating income (loss) | $ | (102,773 | ) | $ | 21,861 | $ | (37,975 | ) | |||
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Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
DEPRECIATION AND AMORTIZATION | |||||||||||
Power segment | $ | 11,231 | $ | 18,532 | $ | 21,561 | |||||
Renewable segment | 2,711 | 2,567 | 2,809 | ||||||||
Industrial segment | 19,073 | 10,345 | 8,066 | ||||||||
Segment depreciation and amortization | 33,015 | 31,444 | 32,436 | ||||||||
Corporate | 6,568 | 3,488 | — | ||||||||
Total depreciation and amortization | $ | 39,583 | $ | 34,932 | $ | 32,436 | |||||
We do not separately identify or report our Company's asset by segment as the majority of our assets are shared by the Power and Renewable segments. Additionally, our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is measured.
Information about our consolidated operations in different geographic areas
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
REVENUES(1) | |||||||||||
United States | $ | 851,955 | $ | 1,034,653 | $ | 934,397 | |||||
United Kingdom | 201,221 | 126,285 | 61,972 | ||||||||
Canada | 74,629 | 134,276 | 136,382 | ||||||||
Denmark | 54,722 | 116,064 | 65,436 | ||||||||
Vietnam | 55,265 | 46,803 | 3,829 | ||||||||
South Korea | 44,660 | 4,358 | 14,149 | ||||||||
Egypt | 35,878 | — | — | ||||||||
China | 33,898 | 41,921 | 53,005 | ||||||||
Germany | 29,559 | 19,233 | 22,792 | ||||||||
Sweden | 24,809 | 18,302 | 29,786 | ||||||||
Dominican Republic | 21,366 | 82,916 | 27,399 | ||||||||
Turkey | 11,113 | — | — | ||||||||
Thailand | 8,051 | 4,606 | 8,113 | ||||||||
Italy | 7,862 | 4,671 | 3,540 | ||||||||
India | 6,856 | 13,108 | 5,070 | ||||||||
Indonesia | 6,723 | 1,730 | 5,324 | ||||||||
Colombia | 6,398 | 4,904 | 8,037 | ||||||||
Finland | 5,756 | 6,113 | 4,926 | ||||||||
Australia | 5,729 | 2,817 | 2,540 | ||||||||
Aggregate of all other countries, each with less than $5 million in revenues | 91,813 | 94,535 | 99,332 | ||||||||
$ | 1,578,263 | $ | 1,757,295 | $ | 1,486,029 | ||||||
(1) We allocate geographic revenues based on the location of the customer's operations.
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Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
NET PROPERTY, PLANT AND EQUIPMENT | |||||||||||
United States | $ | 75,368 | $ | 88,840 | $ | 82,209 | |||||
Mexico | 22,594 | 24,643 | 12,106 | ||||||||
China | 13,460 | 13,956 | 12,356 | ||||||||
United Kingdom | 6,337 | 8,070 | 8,638 | ||||||||
Denmark | 6,749 | 6,265 | 6,963 | ||||||||
Aggregate of all other countries, each with less than $5 million of net property, plant and equipment | 9,129 | 3,943 | 12,965 | ||||||||
$ | 133,637 | $ | 145,717 | $ | 135,237 | ||||||
NOTE 6 – CONTRACTS AND REVENUE RECOGNITION
We generally recognize revenues and related costs from long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as work progresses and reflect adjustments in profit proportionate to the percentage of completion in the periods in which we revise estimates to complete the contract. To the extent that these adjustments result in a reduction of previously reported profits from a project, we recognize a charge against current earnings. Changes in the estimated results of our percentage-of-completion contracts are necessarily based on information available at the time that the estimates are made and are based on judgments that are inherently uncertain as they are predictive in nature. As with all estimates to complete used to measure contract revenue and costs, actual results can and do differ from our estimates made over time.
In the years ended December 31, 2016, 2015 and 2014, we recognized changes in estimates related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Increases in estimates for percentage-of-completion contracts | $ | 42,368 | $ | 36,653 | $ | 50,565 | |||||
Decreases in estimates for percentage-of-completion contracts | (149,169 | ) | (36,235 | ) | (24,234 | ) | |||||
Net changes in estimates for percentage-of-completion contracts | $ | (106,801 | ) | $ | 418 | $ | 26,331 | ||||
During 2016, we recorded a total of $141.1 million in losses from changes in the estimated revenues and costs to complete renewable energy contracts in Europe, of which $98.1 million were recorded in the fourth quarter of 2016. These 2016 losses include $35.8 million of anticipated liquidated damages that reduced revenue.
As we disclosed in prior reports, we incurred $30.9 million in charges (net of $15.0 million of a probable insurance recovery) due to changes in the estimated cost to complete a contract during the second and third quarters of 2016 related to one European renewable energy project. Additional changes in the fourth quarter of 2016 resulted in $19.4 million of additional charges on this project, and this project adversely impacted other European renewable energy projects due to the limited pool of internal and external resources available for these projects, such as engineering, procurement and construction resources, which in turn caused us to revise downward our estimates with respect to our other European renewable energy projects, including three other projects that became loss contracts. As of December 31, 2016, this project is approximately 88% complete. We continue to expect construction activities to be completed and the unit to be operational in early 2017, with remaining commissioning and turnover activities linked to the customer's operation of the facility through mid-2017. Of the $50.3 million of 2016 charges related to this project, $6.4 million is included in "other accrued liabilities" in our consolidated balance sheet at December 31, 2016. At December 31, 2016, we have also recorded estimated liquidated damages of $3.4 million for this project.
The second project became a loss contract in the fourth quarter of 2016, resulting from a charge of $28.1 million in 2016 ($23.0 million in the fourth quarter). As of December 31, 2016, this second project was approximately 67% complete. We expect this second project to be completed in late-2017. Of the $28.1 million of charges in 2016 related to this second project, $5.1 million is included in "accrued other liabilities" in our consolidated balance sheet at December 31, 2016. At December 31, 2016, we have also recorded estimated liquidated damages of $8.0 million for this second project.
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The third project became a loss contract in the fourth quarter of 2016, resulting from $30.1 million of the 2016 charges ($25.2 million in the fourth quarter). As of December 31, 2016, this third project was approximately 82% complete. We expect this third project to be completed in mid-2017. Of the $30.1 million of charges in 2016 related to this third project, $3.9 million is included in "accrued other liabilities" in our consolidated balance sheet at December 31, 2016. At December 31, 2016, we have also recorded estimated liquidated damages of $6.9 million for this third project.
The fourth project became a loss contract in the fourth quarter of 2016, resulting from $16.4 million of the 2016 charges ($16.2 million in the fourth quarter). As of December 31, 2016, this fourth project was approximately 61% complete. We expect this fourth project to be completed in 2018. Of the $16.4 million of charges in 2016 related to this fourth project, $1.6 million is included in "accrued other liabilities" in our consolidated balance sheet at December 31, 2016. At December 31, 2016, we have also recorded estimated liquidated damages of $8.4 million for this fourth project.
We recorded an aggregate of $14.2 million of additional charges in the fourth quarter of 2016 for changes in estimated costs to complete other renewable energy projects. While the charges did not result in any of these other projects becoming loss projects, we expect these changes in estimates to negatively affect our 2017 results of operations by $13.7 million. Accrued liquidated damages associated with these projects total $9.0 million at December 31, 2016.
During 2016, we determined it was probable that we would receive an insurance recovery of approximately $15.0 million for a portion of the losses on the first loss contract described above, which represents the full amount available under the insurance policy. Accordingly, we recognized the insurance recovery as a reduction in costs and recorded the insurance receivable in "accounts receivable - other" in the consolidated balance sheet at December 31, 2016.
The following represent the components of our contracts in progress and advance billings on contracts included in our consolidated balance sheets:
December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Included in contracts in progress: | |||||||
Costs incurred less costs of revenue recognized | $ | 96,210 | $ | 9,966 | |||
Revenues recognized less billings to customers | 69,800 | 118,208 | |||||
Contracts in progress | $ | 166,010 | $ | 128,174 | |||
Included in advance billings on contracts: | |||||||
Billings to customers less revenues recognized | $ | 199,480 | $ | 221,244 | |||
Costs of revenue recognized less cost incurred | 11,162 | 8,146 | |||||
Advance billings on contracts | $ | 210,642 | $ | 229,390 | |||
The following amounts represent retainage on contracts:
December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Retainage expected to be collected within one year | $ | 18,843 | $ | 24,906 | |||
Retainage expected to be collected after one year | 4,583 | 5,329 | |||||
Total retainage | $ | 23,426 | $ | 30,235 | |||
We have included retainage expected to be collected in 2017 in "accounts receivable – trade, net." Retainage expected to be collected after one year are included in "other assets." Of the long-term retainage at December 31, 2016, we anticipate collecting $3.2 million in 2018 and $0.9 million in 2019.
We had no accrued claims receivable balance in our consolidated balance sheets, at December 31, 2016, and a $2.3 million accrued claims receivable balance at December 31, 2015.
NOTE 7 – EQUITY METHOD INVESTMENTS
We have investments in entities that we account for using the equity method. Our equity method investees include joint ventures in China and India, each of which manufactures boiler parts, and a joint venture in Australia that sells and services industrial equipment and other project-related joint ventures.
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We sold all of our interest in our Australian joint venture, Halley & Mellowes Pty. Ltd. ("HMA"), on December 22, 2016 for $18.0 million, resulting in a gain of $8.3 million.
In the year ended December 31, 2014, we purchased the remaining outstanding equity of a coal-fired power plant that was previously an equity method investee. Additionally, in the year ended December 31, 2014, we recognized income from a United States environmental project joint venture. The United States environmental project was substantially completed in 2014 and did not contribute equity income in 2015.
Our investment in equity method investees was not significantly different from our underlying equity in net assets of those investees based on stated ownership percentages at December 31, 2016. All of our investments in unconsolidated entities are included in our Power segment.
Our investment in equity method investees includes a $40.6 million investment in a start-up venture in India, Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), that completed construction of its manufacturing facility intended primarily for new build coal boiler projects in India in 2014. While TBWES has not yet recorded a profit, we have determined that an other-than-temporary-impairment is not present based on the carrying value of its long-lived assets and expected future cash flows. Continuing future losses or changes in the strategy of TBWES or other joint ventures could affect future assessments of other-than-temporary-impairment.
The undistributed earnings of our equity method investees were $59.6 million and $63.4 million at December 31, 2016 and 2015, respectively. Summarized below is consolidated balance sheet and statement of operations information for investments accounted for under the equity method:
December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Current assets | $ | 335,577 | $ | 446,283 | |||
Noncurrent assets | 126,958 | 168,411 | |||||
Total assets | 462,535 | 614,694 | |||||
Current liabilities | 231,150 | 314,390 | |||||
Noncurrent liabilities | 40,537 | 140,349 | |||||
Owners' equity | 190,848 | 159,955 | |||||
Total liabilities and equity | $ | 462,535 | $ | 614,694 | |||
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Revenues | $ | 488,101 | $ | 475,459 | $ | 645,481 | |||||
Gross profit | 76,986 | 69,021 | 85,378 | ||||||||
Income before provision for income taxes | 19,529 | 3,072 | 22,909 | ||||||||
Provision for income taxes | 3,715 | 4,500 | 6,159 | ||||||||
Net income | $ | 15,814 | $ | (1,428 | ) | $ | 16,750 | ||||
The provision for income taxes is based on the tax laws and rates in the countries in which our investees operate. The taxation regimes vary not only by their nominal rates, but also by allowable deductions, credits and other benefits. For some of our United States investees, United States income taxes are the responsibility of the respective owners, which is primarily the reason for the provision for income taxes being low in relation to income before provision for income taxes.
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Reconciliation of net income in the statement of operations of our investees to equity in income of investees in our consolidated and combined statements of operations is as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Equity income based on stated ownership percentages | $ | 7,898 | $ | (542 | ) | $ | 8,563 | ||||
Gain on sale of our interest in HMA | 8,324 | — | — | ||||||||
All other adjustments due to amortization of basis differences, timing of GAAP adjustments and other adjustments | 218 | 300 | 118 | ||||||||
Equity in income of investees | $ | 16,440 | $ | (242 | ) | $ | 8,681 | ||||
Our transactions with unconsolidated affiliates were as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Sales to | $ | 17,220 | $ | 18,014 | $ | 70,566 | |||||
Purchases from | 32,490 | 45,397 | 5,623 | ||||||||
Dividends received | 12,160 | 20,830 | 17,407 | ||||||||
Capital contributions (1) | 26,256 | 7,424 | 4,900 | ||||||||
(1) Capital contributions includes a $26.3 million contribution in April 2016 to increase our interest in TBWES, our joint venture in India, for the purpose of extinguishing the joint venture's high-interest third-party debt and avoiding the associated future interest cost (our joint venture partner contributed the same amount to TBWES).
Our accounts receivable-other includes receivables from these unconsolidated affiliates of $8.5 million and $7.9 million at December 31, 2016 and 2015, respectively.
NOTE 8 – RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
2016 Restructuring activities
On June 28, 2016, we announced actions to restructure our power business in advance of significantly lower demand now projected for power generation from coal in the United States. The new organizational structure includes a redesigned work flow to provide an efficient, flexible organization that can adapt to the changing market conditions and volumes. The costs associated with the restructuring activities were $31.4 million in the year ended December 31, 2016, and were primarily related to employee severance of $14.1 million and non-cash impairment of the long-lived assets at B&W's one coal-fired power plant located in Ebensburg, Pennsylvania of $14.9 million. Other costs associated with the restructuring of $2.4 million are related to organizational realignment of personnel and processes and an increase in valuation allowances associated with our deferred tax assets (see Note 10). The 2016 restructuring activities are expected to allow our business to continue to serve the power market and maintain gross margins, despite the expected decline in volume as a result of the lower projected demand in the US coal-fired power generation market. These restructuring actions are primarily in the Power segment. We expect additional restructuring charges during 2017 of up to $6 million primarily related to office reconfiguration, other facilities costs, consulting and other activities related to the June 28, 2016 restructuring.
Pre-2016 Restructuring activities
Previously announced restructuring initiatives intended to better position us for growth and profitability have primarily been related to facility consolidation and organizational efficiency initiatives. Theses costs were $5.6 million and $11.7 million during the year ended December 31, 2016 and 2015, respectively. We expect additional restructuring charges of up to $5 million primarily related to facility demolition and consolidation activities, which will take place in during the first half of 2017. The full benefits of the pre-2016 restructuring activities may not be fully achieved based on the lower demand now projected in the coal-fired power generation market.
Restructuring liabilities
Restructuring liabilities are included in other accrued liabilities on our consolidated balance sheets. Activity related to the restructuring liabilities is as follows:
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Year Ended December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Balance at beginning of period | $ | 740 | $ | 5,086 | |||
Restructuring expense(1) | 21,939 | 5,014 | |||||
Payments | (20,426 | ) | (9,360 | ) | |||
Balance at December 31 | $ | 2,253 | $ | 740 | |||
(1) | Excludes charges for long-lived asset impairment of $15.0 million and $6.7 million for the years ended December 31, 2016 and 2015, respectively. These non-cash charges did not impact the restructuring liability. |
At December 31, 2016 and 2015, the remaining restructuring liabilities relate to employee termination benefits.
Spin-off transaction costs
In the years ended December 31, 2016 and 2015, we incurred $3.8 million and $3.3 million, respectively, of costs directly related to the spin-off from our former Parent. The costs were primarily attributable to employee retention awards.
NOTE 9 – STOCK-BASED COMPENSATION
2015 Long-Term Incentive Plan of Babcock & Wilcox Enterprises, Inc.
Prior to the spin-off, executive officers, key employees, members of the board of directors and consultants of B&W were eligible to participate in the 2010 Long-Term Incentive Plan of The Babcock & Wilcox Company (the "BWC Plan"). Effective June 30, 2015, executive officers, key employees, members of the board of directors and consultants of B&W are eligible to participate in the 2015 Long-Term Incentive Plan of Babcock & Wilcox Enterprises, Inc. (the "Plan"). The Plan permits grants of nonqualifed stock options, incentive stock options, appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and cash incentive awards. The Plan was amended and restated in 2016 to increase the number of shares available for issuance by 2.5 million shares. The number of shares available for award grants under the Plan, as amended and restated, is 8.3 million, of which 3.3 million million remain available as of December 31, 2016.
In connection with the spin-off, outstanding stock options and restricted stock units granted under the BWC Plan prior to 2015 were replaced with both an adjusted BWC award and a new B&W stock award. These awards, when combined, had terms that were intended to preserve the values of the original awards. Outstanding performance share awards originally issued under the BWC Plan granted prior to 2015 were generally converted into unvested rights to receive the value of deemed target performance in unrestricted shares of a combination of BWC common stock and B&W common stock, determined by reference to the ratio of one share of B&W common stock being distributed for every two shares of BWC common stock in the spin-off, in each case with the same vesting terms as the original awards.
Company stock options
The fair value of each option grant was estimated at the date of grant using Black-Scholes, with the following weighted-average assumptions:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Risk-free interest rate | 1.14 | % | 1.38 | % | 0.97 | % | ||
Expected volatility | 25 | % | 28 | % | 30 | % | ||
Expected life of the option in years | 3.95 | 3.96 | 3.76 | |||||
Expected dividend yield | — | % | — | % | 1.22 | % | ||
The risk-free interest rate is based on the implied yield on a United States Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The expected dividend yield is based on the projected annual dividend payment per
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share divided by the stock price at the date of grant. This amount is zero in 2016 and 2015 because we did not expect to pay dividends on the dates the 2016 and 2015 stock options were awarded.
The following table summarizes activity for our stock options the year ending December 31, 2016:
(share data in thousands) | Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | ||||||||
Outstanding at beginning of period | 2,360 | $ | 17.99 | |||||||||
Granted | 599 | 19.03 | ||||||||||
Exercised | (141 | ) | 16.33 | |||||||||
Cancelled/expired/forfeited | (166 | ) | 18.73 | |||||||||
Outstanding at end of period | 2,652 | $ | 18.27 | 6.52 | $ | 521.3 | ||||||
Exercisable at end of period | 1,269 | $ | 17.77 | 4.58 | $ | 521.3 | ||||||
The aggregate intrinsic value included in the table above represents the total pretax intrinsic value that would have been received by the option holders had all option holders exercised their options on December 31, 2016. The intrinsic value is calculated as the total number of option shares multiplied by the difference between the closing price of our common stock on the last trading day of the period and the exercise price of the options. This amount changes based on the price of our common stock.
The weighted-average fair value of the stock options granted in the years ended December 31, 2016, 2015 and 2014, was $4.03, $4.80 and $7.03, respectively.
During the years ended December 31, 2016, 2015 and 2014, the total intrinsic value of stock options exercised was $0.7 million, $2.3 million and $0.9 million, respectively. The actual tax benefits realized related to the stock options exercised during the year ended December 31, 2016 and 2015 were $0.3 million and not significant, respectively.
Company restricted stock units
Nonvested restricted stock units activity for the year ending December 31, 2016 were as follows:
(share data in thousands) | Number of Shares | Weighted-Average Grant Date Fair Value | ||||
Nonvested at beginning of period | 999 | $ | 19.30 | |||
Granted | 230 | 18.76 | ||||
Vested | (407 | ) | 19.26 | |||
Cancelled/forfeited | (109 | ) | 19.29 | |||
Nonvested at end of period | 712 | $ | 19.14 | |||
The actual tax benefits realized related to the restricted stock units vested during the year ended December 31, 2016 and 2015 were $2.7 million and $1.1 million, respectively.
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Company performance-based restricted stock units
During 2016, we granted certain B&W employees performance-based restricted stock units ("PSUs") under the Plan, which include both performance and service conditions. PSU awards vest upon satisfying certain service requirements and B&W financial metrics established by the board of directors. The fair value of each PSU granted was estimated at the date of grant using a Monte Carlo methodology based on market prices and the following weighted-average assumptions:
Year Ended December 31, | ||
2016 | ||
Risk-free interest rate | 0.96 | % |
Expected volatility | 25 | % |
Expected life of the option in years | 2.83 | |
Expected dividend yield | — | % |
PSU activity for the year ending December 31, 2016 was as follows:
(share data in thousands) | Number of Shares | Weighted-Average Grant Date Fair Value | ||||
Nonvested at beginning of period | — | $ | — | |||
Granted | 493 | 19.31 | ||||
Vested | — | — | ||||
Cancelled/forfeited | (42 | ) | 19.56 | |||
Nonvested at end of period | 451 | $ | 19.29 | |||
NOTE 10 – PROVISION FOR INCOME TAXES
We are subject to federal income tax in the United States and income tax of multiple state and international jurisdictions. We provide for income taxes based on the 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 both nominal rates and the basis on which these rates are applied. This variation, along with the changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period.
We are currently under audit by various state and international authorities. With few exceptions, we do not have any returns under examination for years prior to 2010. The United States Internal Revenue Service has completed its examination of the 2010 through 2012 federal tax returns of BWC, and all matters arising from such examination have been resolved.
We apply the provisions of FASB Topic Income Taxes regarding the treatment of uncertain tax positions. A reconciliation of unrecognized tax benefits follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Balance at beginning of period | $ | 1,141 | $ | 3,321 | $ | 1,190 | |||||
Increases based on tax positions taken in the current year | 178 | 88 | 213 | ||||||||
Increases based on tax positions taken in the prior years | 230 | 248 | 2,268 | ||||||||
Decreases based on tax positions taken in the prior years | — | (1,161 | ) | — | |||||||
Decreases due to settlements with tax authorities | (665 | ) | (1,355 | ) | (350 | ) | |||||
Decreases due to lapse of applicable statute of limitation | — | — | — | ||||||||
Balance at end of period | $ | 884 | $ | 1,141 | $ | 3,321 | |||||
Of the $0.9 million balance of unrecognized tax benefits at December 31, 2016, $0.8 million would reduce our effective tax rate if recognized.
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We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes. During the year ended December 31, 2016, we recorded a decrease in our accruals of less than $0.2 million, resulting in recorded liabilities of approximately $0.1 million for the payment of tax-related interest and penalties. At December 31, 2015 and 2014, our recorded liabilities for the payment of tax-related interest and penalties totaled approximately $0.3 million for both years.
It is unlikely that our previously unrecognized tax benefits will change significantly in the next twelve months.
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of December 31, 2016 and 2015 were as follows:
December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Deferred tax assets: | |||||||
Pension liability | $ | 105,426 | $ | 107,748 | |||
Accrued warranty expense | 11,628 | 12,589 | |||||
Accrued vacation pay | 4,792 | 4,482 | |||||
Accrued liabilities for self-insurance (including postretirement health care benefits) | 6,596 | 14,280 | |||||
Accrued liabilities for executive and employee incentive compensation | 8,334 | 14,255 | |||||
Investments in joint ventures and affiliated companies | 10,742 | 14,100 | |||||
Long-term contracts | 10,318 | 6,963 | |||||
Accrued Legal Fees | 2,110 | — | |||||
Inventory Reserve | 2,445 | 2,621 | |||||
Property, plant and equipment | 1,587 | — | |||||
Net operating loss carryforward | 33,187 | 13,544 | |||||
State tax net operating loss carryforward | 15,372 | 14,409 | |||||
Foreign tax credit carryforward | 3,870 | 2,378 | |||||
Other | 8,589 | 6,585 | |||||
Total deferred tax assets | 224,996 | 213,954 | |||||
Valuation allowance for deferred tax assets | (40,484 | ) | (10,077 | ) | |||
Net, total deferred tax assets | 184,512 | 203,877 | |||||
Deferred tax liabilities: | |||||||
Long-term contracts | 3,601 | 9,084 | |||||
Intangibles | 21,892 | 13,158 | |||||
Property, plant and equipment | — | 3,379 | |||||
Undistributed foreign earnings | 500 | 1,000 | |||||
Goodwill | 1,125 | 1,167 | |||||
Other | 2,885 | 1,317 | |||||
Total deferred tax liabilities | 30,003 | 29,105 | |||||
Net deferred tax assets | $ | 154,509 | $ | 174,772 | |||
At December 31, 2016, we had a valuation allowance of $40.5 million for deferred tax assets, which we expect may not be realized through carrybacks, future reversals of existing taxable temporary differences and estimates of future taxable income. We believe that our remaining deferred tax assets are more likely than not realizable through carrybacks, future reversals of existing taxable temporary differences and estimates of future taxable income. Any changes to our estimated valuation allowance could be material to our consolidated and combined financial statements. The following is an analysis of our valuation allowance for deferred tax assets:
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(in thousands) | Beginning balance | Charges to costs and expenses | Charged to other accounts | Ending balance | |||||||||||
Year Ended December 31, 2016 | $ | (10,077 | ) | $ | (29,307 | ) | $ | (1,100 | ) | $ | (40,484 | ) | |||
Year Ended December 31, 2015 | (9,216 | ) | (861 | ) | — | (10,077 | ) | ||||||||
Year Ended December 31, 2014 | (6,980 | ) | (2,236 | ) | — | (9,216 | ) | ||||||||
We operate in numerous countries that have statutory tax rates below that of the United States federal statutory rate of 35%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 20% and approximately 30%. Income before the provision for income taxes was as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
United States | $ | 1,280 | $ | (20,748 | ) | $ | (64,084 | ) | |||
Other than the United States | (109,419 | ) | 40,953 | 27,466 | |||||||
Income before provision for income taxes | $ | (108,139 | ) | $ | 20,205 | $ | (36,618 | ) | |||
The provision for income taxes consisted of:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Current: | |||||||||||
United States – federal | $ | 284 | $ | 24,084 | $ | 1,834 | |||||
United States – state and local | (415 | ) | 3,458 | 1,544 | |||||||
Other than in the United States | 4,504 | 8,250 | 13,917 | ||||||||
Total current | 4,373 | 35,792 | 17,295 | ||||||||
Deferred: | |||||||||||
United States – Federal | 11,512 | (35,888 | ) | (32,910 | ) | ||||||
United States – state and local | 6,365 | (111 | ) | (572 | ) | ||||||
Other than in the United States | (15,307 | ) | 3,878 | (8,541 | ) | ||||||
Total deferred (benefit) provision | 2,570 | (32,121 | ) | (42,023 | ) | ||||||
Provision for income taxes | $ | 6,943 | $ | 3,671 | $ | (24,728 | ) | ||||
The following is a reconciliation of the U.S. statutory federal tax rate (35%) to the consolidated effective tax rate:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
U.S. federal statutory (benefit) rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
State and local income taxes | (3.5 | ) | 13.8 | 4.1 | ||||
Foreign rate differential | (12.8 | ) | (13.1 | ) | 16.6 | |||
Tax credits | 3.0 | (14.7 | ) | 7.5 | ||||
Dividends and deemed dividends from affiliates | (0.2 | ) | 1.7 | 5.7 | ||||
Valuation allowances | (28.1 | ) | 4.3 | (6.1 | ) | |||
Uncertain tax positions | 0.3 | (6.6 | ) | (6.7 | ) | |||
Non-deductible expenses | (1.8 | ) | 2.4 | (2.4 | ) | |||
Manufacturing deduction | — | (2.5 | ) | 11.6 | ||||
Other | 1.7 | (2.1 | ) | 2.2 | ||||
Effective tax rate | (6.4 | )% | 18.2 | % | 67.5 | % | ||
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We have foreign net operating loss benefits after tax of $23.8 million available to offset future taxable income in foreign jurisdictions. Of the foreign net operating loss benefits, $0.5 million is scheduled to expire in 2017 to 2027. The remaining net operating loss benefits have unlimited lives. We are carrying a valuation allowance of $17.6 million against the deferred tax asset related to the foreign loss carryforwards.
In 2016, we generated a U.S. federal net operating loss resulting in an after tax benefit of $9.4 million. We expect to fully utilize this net operating loss either through carryback to our former Parent company's tax return or through carryover to future periods. The U.S. federal operating loss will not expire until 2037. We have foreign tax credit carryovers of $3.9 million. Of this $3.9 million, $1.2 million will expire between 2022 and 2024. The remaining amount of the foreign tax credit carryover was generated in the current year and will expire in 2027. We have state net operating loss benefits after tax of $15.4 million available to offset future taxable income in various states. Our state net operating loss carryforwards begin to expire in the year 2017. We are carrying a valuation allowance of $12.4 million against the deferred tax asset related to the state loss carryforwards.
We would be subject to withholding taxes as well as U.S. income tax if we were to distribute earnings from certain foreign subsidiaries. For the year ended December 31, 2016, the undistributed earnings of these subsidiaries were $278.7 million. Unrecognized deferred income tax liabilities, including withholding taxes, of approximately $33.6 million would be payable upon distribution of these earnings after taking into account any related foreign tax credits. We have provided tax of $0.5 million on earnings we intend to remit. All other earnings are considered permanently reinvested.
NOTE 11 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the consolidated and combined statements of operations once they are realized. The changes in the components of AOCI, net of tax, for the years ended 2016, 2015 and 2014 were as follows:
(in thousands) | Currency translation gain (loss) | Net unrealized gain (loss) on investments (net of tax) | Net unrealized gain (loss) on derivative instruments | Net unrecognized gain (loss) related to benefit plans (net of tax) | Total | ||||||||||||||
Balance at December 31, 2013 | $ | 38,446 | $ | (20 | ) | $ | 627 | $ | (3,677 | ) | $ | 35,376 | |||||||
Other comprehensive income (loss) before reclassifications | (26,895 | ) | (2 | ) | (2,360 | ) | 3,956 | (25,301 | ) | ||||||||||
Amounts reclassified from AOCI to net income (loss) | — | — | 1,610 | (1,311 | ) | 299 | |||||||||||||
Net current-period other comprehensive income | (26,895 | ) | (2 | ) | (750 | ) | 2,645 | (25,002 | ) | ||||||||||
Balance at December 31, 2014 | 11,551 | (22 | ) | (123 | ) | (1,032 | ) | 10,374 | |||||||||||
Other comprehensive income (loss) before reclassifications | (19,459 | ) | (49 | ) | 339 | 519 | (18,650 | ) | |||||||||||
Amounts reclassified from AOCI to net income (loss) | — | 27 | 1,133 | (195 | ) | 965 | |||||||||||||
Net transfers from parent | (11,585 | ) | — | 437 | (394 | ) | (11,542 | ) | |||||||||||
Net current-period other comprehensive income (loss) | (31,044 | ) | (22 | ) | 1,909 | (70 | ) | (29,227 | ) | ||||||||||
Balance at December 31, 2015 | (19,493 | ) | (44 | ) | 1,786 | (1,102 | ) | (18,853 | ) | ||||||||||
Other comprehensive income (loss) before reclassifications | (24,494 | ) | 7 | 2,046 | 7,692 | (14,749 | ) | ||||||||||||
Amounts reclassified from AOCI to net income (loss) | — | — | (3,030 | ) | 150 | (2,880 | ) | ||||||||||||
Net current-period other comprehensive income (loss) | (24,494 | ) | 7 | (984 | ) | 7,842 | (17,629 | ) | |||||||||||
Balance at December 31, 2016 | $ | (43,987 | ) | $ | (37 | ) | $ | 802 | $ | 6,740 | $ | (36,482 | ) | ||||||
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The amounts reclassified out of AOCI by component and the affected consolidated and combined statements of operations line items are as follows (in thousands):
AOCI Component | Line Items in the Consolidated and Combined Statements of Operations Affected by Reclassifications from AOCI | |||||||||||||
Year Ended December 31, | ||||||||||||||
2016 | 2015 | 2014 | ||||||||||||
Derivative financial instruments | Revenues | $ | 4,624 | $ | 546 | $ | (53 | ) | ||||||
Cost of operations | 195 | 155 | 13 | |||||||||||
Other-net | (1,221 | ) | (24 | ) | (6 | ) | ||||||||
Total before tax | 3,598 | 677 | (46 | ) | ||||||||||
Provision for income taxes | 568 | 149 | (11 | ) | ||||||||||
Net income (loss) | $ | 3,030 | $ | 528 | $ | (35 | ) | |||||||
Amortization of prior service cost on benefit obligations | Cost of operations | $ | 254 | $ | (1,475 | ) | $ | (457 | ) | |||||
Provision for income taxes | 404 | (1,168 | ) | (183 | ) | |||||||||
Net income (loss) | $ | (150 | ) | $ | (307 | ) | $ | (274 | ) | |||||
Realized gain on investments | Other-net | $ | — | $ | (42 | ) | $ | — | ||||||
Provision for income taxes | — | (15 | ) | — | ||||||||||
Net income (loss) | $ | — | $ | (27 | ) | $ | — | |||||||
NOTE 12 – CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
Held by foreign entities | $ | 94,415 | $ | 221,151 | |||
Held by United States entities | 1,472 | 144,041 | |||||
Cash and cash equivalents | $ | 95,887 | $ | 365,192 | |||
Reinsurance reserve requirements | $ | 21,189 | $ | 33,404 | |||
Restricted foreign accounts | 6,581 | 3,740 | |||||
Restricted cash and cash equivalents | $ | 27,770 | $ | 37,144 | |||
NOTE 13 – INVENTORIES
The components of inventories are as follows:
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
Raw materials and supplies | $ | 61,630 | $ | 68,684 | |||
Work in progress | 6,803 | 7,025 | |||||
Finished goods | 17,374 | 14,410 | |||||
Total inventories | $ | 85,807 | $ | 90,119 | |||
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NOTE 14 – INTANGIBLE ASSETS
Our intangible assets are as follows:
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
Definite-lived intangible assets | |||||||
Customer relationships | $ | 47,892 | $ | 35,729 | |||
Unpatented technology | 18,461 | 4,033 | |||||
Patented technology | 2,499 | 2,532 | |||||
Tradename | 18,774 | 9,909 | |||||
Backlog | 28,170 | 10,400 | |||||
All other | 7,430 | 7,504 | |||||
Gross value of definite-lived intangible assets | 123,225 | 70,107 | |||||
Customer relationships amortization | (17,519 | ) | (12,509 | ) | |||
Unpatented technology amortization | (2,864 | ) | (1,471 | ) | |||
Patented technology amortization | (1,532 | ) | (1,406 | ) | |||
Tradename amortization | (3,826 | ) | (2,883 | ) | |||
Acquired backlog amortization | (21,776 | ) | (10,400 | ) | |||
All other amortization | (5,974 | ) | (4,899 | ) | |||
Accumulated amortization | (53,491 | ) | (33,568 | ) | |||
Net definite-lived intangible assets | $ | 69,734 | $ | 36,539 | |||
Indefinite-lived intangible assets: | |||||||
Trademarks and trade names | $ | 1,305 | $ | 1,305 | |||
Total indefinite-lived intangible assets | $ | 1,305 | $ | 1,305 | |||
The following summarizes the changes in the carrying amount of intangible assets:
Twelve months ended | |||||||
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
Balance at beginning of period | $ | 37,844 | $ | 50,646 | |||
Business acquisitions and adjustments | 55,438 | 500 | |||||
Amortization expense | (19,923 | ) | (11,445 | ) | |||
Currency translation adjustments and other | (2,320 | ) | (1,857 | ) | |||
Balance at end of the period | $ | 71,039 | $ | 37,844 | |||
The acquisition of SPIG increased our intangible asset amortization expense during the year ended December 31, 2016 by $13.3 million. Amortization of intangible assets is not allocated to segment results.
Estimated future intangible asset amortization expense, excluding any potential intangible asset amortization expense resulting from the January 11, 2017 acquisition of Universal, is as follows (in thousands):
Year ending | Amortization expense | ||
December 31, 2017 | $ | 14,834 | |
December 31, 2018 | $ | 10,208 | |
December 31, 2019 | $ | 8,545 | |
December 31, 2020 | $ | 7,293 | |
December 31, 2021 | $ | 6,971 | |
Thereafter | $ | 21,883 | |
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NOTE 15 - GOODWILL
The following summarizes the changes in the carrying amount of goodwill:
(in thousands) | Power | Renewable | Industrial | Total | |||||||||||
Balance at December 31, 2014 | $ | 48,755 | $ | 51,722 | $ | 108,800 | $ | 209,277 | |||||||
Purchase price adjustment - MEGTEC acquisition | — | — | (4,492 | ) | (4,492 | ) | |||||||||
Currency translation adjustments | (1,618 | ) | (2,098 | ) | — | (3,716 | ) | ||||||||
Balance at December 31, 2015 | $ | 47,137 | $ | 49,624 | $ | 104,308 | $ | 201,069 | |||||||
Increase resulting from SPIG acquisition | — | — | 69,862 | 69,862 | |||||||||||
Purchase price adjustment - SPIG acquisition | — | — | 2,539 | 2,539 | |||||||||||
Currency translation adjustments | (917 | ) | (1,189 | ) | (3,969 | ) | (6,075 | ) | |||||||
Balance at December 31, 2016 | $ | 46,220 | $ | 48,435 | $ | 172,740 | $ | 267,395 | |||||||
Our annual goodwill impairment assessment is performed on October 1 of each year (the "annual assessment" date). Our 2016 annual assessment for each of our five reporting units indicated that we had no impairment of goodwill. The fair value of our reporting units were all in excess of carrying value on the assessment date by at least 20%. The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a 50% weighting of a discounted cash flow analysis under the income approach using forward-looking projections of estimated future operating results, a 30% weighting of a guideline company methodology under the market approach using revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, and a 20% weighting using the similar transactions methodology under the market approach using revenue and EBITDA multiples.
The goodwill impairment test associated with our MEGTEC reporting unit, which is included in our Industrial segment, is the most sensitive to a change in future valuation assumptions. The reporting unit has $104.3 million of goodwill, which is unchanged since June 30, 2015. As of the annual assessment date in 2016 and 2015, the fair value of our MEGTEC reporting unit exceeded its carrying value by 22% and 48%, respectively. The change in headroom was attributable to a decrease in the estimated fair value of the reporting unit from $182.8 million to $163.8 million as of our annual assessment date in 2015 and 2016, respectively, and a $11.5 million increase in the carrying value of the reporting unit. Under both the income and market valuation approaches, the independently obtained fair value estimates decreased due to lower projected net sales and EBITDA. Similar to many industrial businesses, the 2016 reduction in MEGTEC reporting unit revenues has been the result of a decline in new equipment demand, primarily in the Americas market. However, management believes the industrials market is starting to show signs of stabilizing.
The Renewable segment's fourth quarter results caused us to also evaluate whether its goodwill was impaired at December 31, 2016. The Renewable segment has $48.4 million of goodwill at December 31, 2016. We estimated the fair value of the reporting unit at that date under Step 1 of the goodwill impairment test. Based on the results of the Step 1 impairment test at December 31, 2016, we determined it was not more likely than not that the segment's goodwill is impaired because the fair value of the Renewable reporting unit significantly exceeded its carrying value. We also assessed whether there was any indication of goodwill impairment in our other four reporting units at December 31, 2016, and have concluded based on our qualitative assessment that it is not more likely than not that the fair value is less than the carrying value.
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NOTE 16 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is stated at cost. The composition of our property, plant and equipment less accumulated depreciation is set forth below:
December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Land | $ | 6,348 | $ | 7,460 | |||
Buildings | 114,322 | 104,963 | |||||
Machinery and equipment | 189,489 | 181,064 | |||||
Property under construction | 22,378 | 36,534 | |||||
332,537 | 330,021 | ||||||
Less accumulated depreciation | 198,900 | 184,304 | |||||
Net property, plant and equipment | $ | 133,637 | $ | 145,717 | |||
NOTE 17 – WARRANTY EXPENSE
Changes in the carrying amount of our accrued warranty expense are as follows:
Year Ended December 31, | |||||||||||
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Balance at beginning of period | $ | 39,847 | $ | 37,735 | $ | 38,968 | |||||
Additions | 22,472 | 19,310 | 13,726 | ||||||||
Expirations and other changes | (10,855 | ) | (982 | ) | (4,052 | ) | |||||
Increases attributable to business combinations | 918 | — | 4,693 | ||||||||
Payments | (11,089 | ) | (15,215 | ) | (14,787 | ) | |||||
Translation and other | (826 | ) | (1,001 | ) | (813 | ) | |||||
Balance at end of period | $ | 40,467 | $ | 39,847 | $ | 37,735 | |||||
During the fourth quarter of 2016, we reduced accrued warranty expense by $2.3 million as a result of the outcome of the ARPA trial discussed further in Note 20. Other decreases in accrued warranty expense were primarily related to improvements in warranty claims experience and lapses in contract warranty periods in our Power segment.
NOTE 18 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
We have historically provided defined benefit retirement benefits to domestic employees under the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "Company Plan"), a noncontributory plan. As of 2006, the Company Plan was closed to new salaried plan entrants. In October 2012, we notified employees that, effective December 31, 2015, benefit accruals for those salaried employees covered by, and continuing to accrue service and salary adjusted benefits under the Company Plan will cease. Furthermore, beginning on January 1, 2016, we will make service-based, cash contributions to a defined contribution plan for those employees impacted by the plan freeze.
Effective January 1, 2012, a defined contribution component was adopted applicable to Babcock & Wilcox Canada, Ltd. (the "Canadian Plans"). Any employee with less than two years of continuous service as of December 31, 2011 was required to enroll in the defined contribution component of the Canadian Plans as of January 1, 2012 or upon the completion of 6 months of continuous service, whichever is later. These and future employees will not be eligible to enroll in the defined benefit component of the Canadian Plans. Additionally, during the third quarter of 2014, benefit accruals under certain hourly Canadian pension plans were ceased with an effective date of January 1, 2015. This amendment to the Canadian Plans is reflected as a curtailment in 2014. As part of the spin-off transaction, we are splitting the Canadian defined benefit plans from BWC, but as of December 31, 2016, that split is not complete. We have not presented these plans as multi-employer plans because our portion is separately identifiable and we were able to assess the assets, liabilities and periodic expense in the same manner as if it were a separate plan in each period.
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We do not provide retirement benefits to certain non-resident alien employees of foreign subsidiaries. Retirement benefits for salaried employees who accrue benefits in a defined benefit plan are based on final average compensation and years of service, while benefits for hourly paid employees are based on a flat benefit rate and years of service. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended, or other applicable law. Funding provisions under the Pension Protection Act accelerate funding requirements to ensure full funding of benefits accrued.
We make available other benefits which include postretirement health care and life insurance benefits to certain salaried and union retirees based on their union contracts, and on a limited basis, to future retirees.
Obligations and funded status
Pension Benefits Year Ended December 31, | Other Postretirement Benefits Year Ended December 31, | ||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation at beginning of period | $ | 1,205,163 | $ | 1,253,278 | $ | 31,889 | $ | 34,909 | |||||||
Service cost | 1,680 | 13,677 | 23 | 24 | |||||||||||
Interest cost | 40,875 | 49,501 | 897 | 1,143 | |||||||||||
Plan participants’ contributions | — | 156 | 574 | 276 | |||||||||||
Curtailments | 266 | — | — | — | |||||||||||
Settlements | — | — | — | — | |||||||||||
Transfers /Acquisition | — | 15,992 | — | 234 | |||||||||||
Amendments | 231 | 244 | (10,801 | ) | — | ||||||||||
Actuarial loss (gain) | 43,410 | (47,098 | ) | (7,162 | ) | (296 | ) | ||||||||
Loss (gain) due to transfer | 3,641 | (523 | ) | — | — | ||||||||||
Foreign currency exchange rate changes | (5,099 | ) | (11,450 | ) | 50 | (367 | ) | ||||||||
Benefits paid | (78,447 | ) | (68,614 | ) | (3,563 | ) | (4,034 | ) | |||||||
Benefit obligation at end of period | $ | 1,211,720 | $ | 1,205,163 | $ | 11,907 | $ | 31,889 | |||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets at beginning of period | $ | 923,030 | $ | 999,515 | $ | — | $ | — | |||||||
Actual return on plan assets | 76,570 | (19,623 | ) | — | — | ||||||||||
Employer contribution | 3,986 | 8,711 | 2,989 | 3,758 | |||||||||||
Plan participants' contributions | — | 156 | 574 | 276 | |||||||||||
Settlements | — | — | — | — | |||||||||||
Transfers | 2,744 | 13,974 | — | — | |||||||||||
Foreign currency exchange rate changes | (5,015 | ) | (11,089 | ) | — | — | |||||||||
Benefits paid | (78,447 | ) | (68,614 | ) | (3,563 | ) | (4,034 | ) | |||||||
Fair value of plan assets at the end of period | 922,868 | 923,030 | — | — | |||||||||||
Funded status | $ | (288,852 | ) | $ | (282,133 | ) | $ | (11,907 | ) | $ | (31,889 | ) | |||
Amounts recognized in the balance sheet consist of: | |||||||||||||||
Accrued employee benefits | $ | (1,099 | ) | $ | (1,927 | ) | $ | (1,722 | ) | $ | (4,620 | ) | |||
Accumulated postretirement benefit obligation | — | — | (10,185 | ) | (27,269 | ) | |||||||||
Pension liability | (287,753 | ) | (281,711 | ) | — | — | |||||||||
Prepaid pension | — | 1,505 | — | — | |||||||||||
Accrued benefit liability, net | $ | (288,852 | ) | $ | (282,133 | ) | $ | (11,907 | ) | $ | (31,889 | ) | |||
Amount recognized in accumulated comprehensive income (before taxes): | |||||||||||||||
Prior service cost (credit) | $ | 432 | $ | 1,976 | $ | (10,801 | ) | $ | — | ||||||
Supplemental information: | |||||||||||||||
Plans with accumulated benefit obligation in excess of plan assets | |||||||||||||||
Projected benefit obligation | $ | 1,183,345 | $ | 1,175,511 | $ | — | $ | — | |||||||
Accumulated benefit obligation | $ | 1,206,056 | $ | 1,172,591 | $ | 11,907 | $ | 31,889 | |||||||
Fair value of plan assets | $ | 894,105 | $ | 891,873 | $ | — | $ | — | |||||||
Plans with plan assets in excess of accumulated benefit obligation | |||||||||||||||
Projected benefit obligation | $ | 28,375 | $ | 29,652 | $ | — | $ | — | |||||||
Accumulated benefit obligation | $ | 28,375 | $ | 29,652 | $ | — | $ | — | |||||||
Fair value of plan assets | $ | 28,763 | $ | 31,157 | $ | — | $ | — | |||||||
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Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
Pension Benefits | Other Benefits | ||||||||||||||||||||||
(in thousands) | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
Service cost | $ | 1,680 | $ | 13,677 | $ | 13,558 | $ | 23 | $ | 24 | $ | 18 | |||||||||||
Interest cost | 40,875 | 49,501 | 51,181 | 897 | 1,143 | 1,087 | |||||||||||||||||
Expected return on plan assets | (61,939 | ) | (68,709 | ) | (64,023 | ) | — | — | — | ||||||||||||||
Amortization of prior service cost | 250 | 307 | 274 | — | — | — | |||||||||||||||||
Recognized net actuarial loss (gain) | 31,932 | 41,574 | 99,090 | (7,822 | ) | (1,364 | ) | 2,245 | |||||||||||||||
Net periodic benefit cost (benefit) | $ | 12,798 | $ | 36,350 | $ | 100,080 | $ | (6,902 | ) | $ | (197 | ) | $ | 3,350 | |||||||||
During 2016, we recorded adjustments to our benefit plan liabilities resulting from pension curtailment and settlement events. Lump sum payments from our Canadian pension plan during 2016 resulted in interim pension plan settlement charges totaling $1.2 million in 2016. Also, in May 2016, the closure of our West Point, Mississippi manufacturing facility resulted in a $1.8 million curtailment charge in our United States pension plan. These events also resulted in $27.5 million in interim MTM losses for these pension plans, the effects of which are reflected in "Recognized net actuarial loss" in the table above along with a $1.4 million loss for the annual MTM adjustment of our pension plans at December 31, 2016.
We terminated the Babcock & Wilcox Retiree Medical Plan (the "Retiree OPEB plan") effective December 31, 2016. The Retiree OPEB plan was originally established to provide secondary medical insurance coverage for retirees that had reached the age of 65, up to a lifetime maximum cost. The Retiree OPEB plan had no plan assets, no accumulated other comprehensive income balance and no active participants as of the termination date. In exchange for terminating the Retiree OPEB plan, the participants had the option to enroll in a third-party health care exchange, which B&W agreed to contribute up to $750 a year for each of the next three years (beginning in 2017), provided the plan participant had not yet reached their lifetime maximum under the terminated Retiree OPEB plan. Based on the number of participants who did not enroll in the new benefit plan, we recognized a settlement gain of $7.2 million on December 31, 2016. Based on the number of participants who did enroll in the new benefit plan, we recognized a curtailment gain of $10.8 million on December 31, 2016 for the actuarially determined difference in the liability for these participants in the Retiree OPEB plan and the new plan. The settlement gain is reported in the "Recognized net actuarial loss" in the table above, and the curtailment gain was deferred in accumulated other comprehensive income and will be recognized in 2017, 2018 and 2019.
Recognized net actuarial loss (gain) consists primarily of our reported actuarial loss (gain), curtailments and the difference between the actual return on plan assets and the expected return on plan assets. Total net mark to market adjustments for our pension and other postretirement benefit plans were losses of $24.1 million, $40.2 million and $101.3 million in the years ended December 31, 2016, 2015 and 2014, respectively. In 2016, the mark to market adjustment reflects $25.0 million of charges related to the Company Plan, including a $24.1 million remeasurement of our West Point plan made in the second quarter. Other significant pension items include a $2.1 million increase of our Diamond Power United Kingdom plan liability in the fourth quarter, a $3.9 million year to date increase in our Canadian plans, primarily resulting from a $1.2 million plan settlement and $2.9 million remeasurement made in the second quarter. This was partially offset by a $6.6 million actuarial gain on our domestic Medical and Life Insurance plan. As discussed in Note 5, we have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in Note 5 as the mark to market adjustment in the reconciliation of reportable segment income (loss) to consolidated operating income (loss). The recognized net actuarial loss and the affected consolidated and combined statements of operations line items are as follows:
(in thousands) | 2016 | 2015 | 2014 | ||||||||
Cost of operations | $ | 21,208 | $ | 44,307 | $ | 94,204 | |||||
Selling, general and administrative expenses | 2,902 | (4,097 | ) | 7,233 | |||||||
Other-net | — | — | (102 | ) | |||||||
Total | $ | 24,110 | $ | 40,210 | $ | 101,335 | |||||
Additional information
In 2016, we have recognized expense (income) in other comprehensive income (loss) as a component of net periodic benefit cost of approximately $0.3 million for our pension benefits. No expense (income) was recognized for other postretirement
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benefits in 2016. In 2017, we do not expect to recognize any significant income or expense in other comprehensive income (loss) as a component of net periodic benefit cost or our pension benefits and other postretirement benefits. However, we expect to recognize a gain of approximately $3.6 million in our 2017 statement of operations related to the the reclassification from accumulated other comprehensive income of a portion of the Retiree OPEB curtailment gain discussed above.
Assumptions
Pension Benefits | Other Benefits | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Weighted average assumptions used to determine net periodic benefit obligations at December 31: | |||||||||||
Discount rate | 4.13 | % | 3.98 | % | 3.66 | % | 3.41 | % | |||
Rate of compensation increase | 2.40 | % | 2.51 | % | — | — | |||||
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31: | |||||||||||
Discount rate | 4.25 | % | 3.99 | % | 3.66 | % | 3.40 | % | |||
Expected return on plan assets | 6.70 | % | 6.98 | % | — | % | — | % | |||
Rate of compensation increase | 2.40 | % | 2.56 | % | — | % | — | % | |||
The expected rate of return on plan assets is based on the long-term expected returns for the investment mix of assets currently in the portfolio. In setting this rate, we use a building-block approach. Historic real return trends for the various asset classes in the plan's portfolio are combined with anticipated future market conditions to estimate the real rate of return for each asset class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each asset class. 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 asset classes within the total asset portfolio. We use an expected return on plan assets assumption of 6.89% for the majority of our pension plan assets (approximately 93% of our total pension assets at December 31, 2016).
2016 | 2015 | ||||
Assumed health care cost trend rates at December 31 | |||||
Health care cost trend rate assumed for next year | 8.50 | % | 8.50 | % | |
Rates to which the cost trend rate is assumed to decline (ultimate trend rate) | 4.50 | % | 4.50 | % | |
Year that the rate reaches ultimate trend rate | 2024 | 2024 | |||
Investment goals
The overall investment strategy of the pension trusts is to achieve long-term growth of principal, while avoiding excessive risk and to minimize the probability of loss of principal over the long term. The specific investment goals that have been set for the pension trusts in the aggregate are (1) to ensure that plan liabilities are met when due and (2) to achieve an investment return on trust assets consistent with a reasonable level of risk.
Allocations to each asset class for both domestic and foreign plans are reviewed periodically and rebalanced, if appropriate, to assure the continued relevance of the goals, objectives and strategies. The pension trusts for both our domestic and foreign plans employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the plans' overall investment objectives. The goals of each investment manager are (1) to meet (in the case of passive accounts) or exceed (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark.
The investment performance of total portfolios, as well as asset class components, is periodically measured against commonly accepted benchmarks, including the individual investment manager benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.
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Domestic plans: We sponsor the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations domestic defined benefit plan. The assets of this plan are commingled for investment purposes with the Company's other sponsored domestic defined benefit plans and held by the Trustee in The Babcock & Wilcox Company Master Trust (the "Master Trust"). For the years ended December 31, 2016 and 2015, the investment return on domestic plan assets of the Master Trust (net of deductions for management fees) was approximately 9.0% and (1.9)%, respectively.
The following is a summary of the asset allocations for the Master Trust at December 31, 2016 and 2015 by asset category:
2016 | 2015 | ||||
Asset Category: | |||||
Fixed Income (excluding United States Government Securities) | 32 | % | 33 | % | |
Commingled and Mutual Funds | 38 | % | 37 | % | |
United States Government Securities | 20 | % | 18 | % | |
Equity Securities | 7 | % | 7 | % | |
Partnerships with Security Holdings | — | % | — | % | |
Derivatives | 1 | % | 4 | % | |
Other | 2 | % | 1 | % | |
The target asset allocation for the domestic defined benefit plan is 55% fixed income and 45% equities.
Foreign plans: We sponsor various plans through certain of our foreign subsidiaries. These plans are the Canadian Plans and the Diamond Power Specialty Limited Retirement Benefits Plan (the "Diamond United Kingdom Plan").
The combined weighted average asset allocations of these plans at December 31, 2016 and 2015 by asset category were as follows:
2016 | 2015 | ||||
Asset Category: | |||||
Equity Securities and Commingled Mutual Funds | 44 | % | 48 | % | |
Fixed Income | 55 | % | 51 | % | |
Other | 1 | % | 1 | % | |
The target allocation for 2016 for the foreign plans, by asset class, is as follows:
Canadian Plans | Diamond UK Plan | ||||
Asset Class: | |||||
U. S. Equity | 27 | % | 10 | % | |
Global Equity | 23 | % | 12 | % | |
Fixed Income | 50 | % | 78 | % | |
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Fair value of plan assets
See Note 22 for a detailed description of fair value measurements and the hierarchy established for valuation inputs. The following is a summary of total investments for our plans measured at fair value at December 31, 2016:
(in thousands) | 12/31/2016 | Level 1 | Level 2 | ||||||||
Fixed income | $ | 321,847 | $ | — | $ | 321,847 | |||||
Equities | 83,441 | 78,268 | 5,173 | ||||||||
Commingled and mutual funds | 349,348 | 4,609 | 344,739 | ||||||||
U.S. government securities | 156,599 | 156,599 | — | ||||||||
Cash and accrued items | 11,630 | 9,391 | 2,239 | ||||||||
Total pension and other postretirement benefit assets | $ | 922,865 | $ | 248,867 | $ | 673,998 | |||||
The following is a summary of total investments for our plans measured at fair value at December 31, 2015:
(in thousands) | 12/31/2015 | Level 1 | Level 2 | ||||||||
Fixed income | $ | 347,269 | $ | — | $ | 347,269 | |||||
Equities | 79,761 | 79,761 | — | ||||||||
Commingled and mutual funds | 330,216 | — | 330,216 | ||||||||
U.S. government securities | 155,975 | 155,975 | — | ||||||||
Cash and accrued items | 9,809 | 539 | 9,270 | ||||||||
Total pension and other postretirement benefit assets | $ | 923,030 | $ | 236,275 | $ | 686,755 | |||||
The following is a summary of the changes in the Plans' Level 3 instruments measured on a recurring basis for the years ended December 31, 2016 and 2015:
Year ended December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Balance at beginning of period | $ | — | $ | 51,108 | |||
Issuances and acquisitions | — | 1,266 | |||||
Dispositions | — | (53,417 | ) | ||||
Realized gain | — | 3,915 | |||||
Unrealized gain | — | (2,872 | ) | ||||
Balance at end of period | $ | — | $ | — | |||
During 2015, our Level 3 instruments included assets with no market price but rather calculations of net asset values per share or its equivalent. When appropriate, we adjusted these net asset values for contributions and distributions, if any, made during the period beginning on the latest net asset value valuation date and ending on our measurement date. We also considered available market data, relevant index returns, preliminary estimates from our investees and other data obtained through research and consultation with third party advisors in determining the fair value of our Level 3 instruments. All of our Level 3 assets were transferred to our former Parent during the spin-off transaction.
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Cash flows
Domestic Plans | Foreign Plans | ||||||||||||||
(in thousands) | Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||
Expected employer contributions to trusts of defined benefit plans: | |||||||||||||||
2017 | $ | 14,607 | $ | 2,100 | $ | 3,127 | $ | 155 | |||||||
Expected benefit payments: | |||||||||||||||
2017 | $ | 68,492 | $ | 1,593 | $ | 2,769 | $ | 155 | |||||||
2018 | 69,965 | 1,459 | 2,835 | 155 | |||||||||||
2019 | 71,223 | 1,330 | 2,977 | 155 | |||||||||||
2020 | 72,267 | 859 | 3,050 | 157 | |||||||||||
2021 | 72,857 | 797 | 3,099 | 151 | |||||||||||
2022-2026 | 363,406 | 3,148 | 17,737 | 591 | |||||||||||
Defined contribution plans
We provide benefits under The B&W Thrift Plan (the "Thrift Plan"). The Thrift Plan generally provides for matching employer contributions of 50% of participants' contributions up to 6% of compensation. These matching employer contributions are typically made in cash. We also provide service-based cash contributions under the Thrift Plan to employees not accruing benefits under our defined benefit plans. Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately $13.4 million, $8.9 million and $7.4 million in the years ended December 31, 2016, 2015 and 2014, respectively.
We also provide benefits under the MEGTEC Union Plan, a defined contribution plan. The total employer contribution expense for the Union plan was approximately $0.3 million, $0.3 million and $0.3 million in the years ended December 31, 2016, 2015 and 2014, respectively. Matching employer contributions are made in cash.
Effective December 31, 2016, we merged the MEGTEC Non-union Plan and SPIG 401(k) defined contribution plans into the Thrift Plan. For the MEGTEC Non-union Plan, amounts charged to expense for our contributions were approximately $1.1 million, $1.1 million and $1.2 million in the years ended December 31, 2016 2015 and 2014, respectively. Matching employer contributions are made in cash. The SPIG 401(k) plan contributions were also made in cash, and were not material to our consolidated financial statements in 2016.
Also, our salaried Canadian employees are provided with a defined contribution plan. As of and in the periods following January 1, 2012, we made cash, service-based contributions under this arrangement. The amount charged to expense for employer contributions was approximately $0.4 million, $0.1 million and $0.6 million in the years ended December 31, 2016, 2015 and 2014, respectively.
Multi-employer plans
One of our subsidiaries in the Power segment contributes to various multi-employer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The following table summarizes our contributions to multi-employer plans for the years covered by this report:
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Pension Fund | EIN/PIN | Pension Protection Act Zone Status | FIP/RP Status Pending/ Implemented | Contributions | Surcharge Imposed | Expiration Date Of Collective Bargaining Agreement | ||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
2016 | 2015 | (in millions) | ||||||||||||||||||||||
Boilermaker-Blacksmith National Pension Trust | 48-6168020/ 001 | Yellow | Yellow | Yes | $ | 17.8 | $ | 20.3 | $ | 16.0 | No | Described Below | ||||||||||||
All Other | 3.2 | 4.6 | 4.6 | |||||||||||||||||||||
$ | 21.0 | $ | 24.9 | $ | 20.6 | |||||||||||||||||||
Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust (the "Boilermaker Plan") is under a National Maintenance Agreement platform which is evergreen in terms of expiration. However, the agreement allows for termination by either party with a 90-day written notice. Our contributions to the Boilermaker Plan constitute less than 5% of total contributions to the Boilermaker Plan. All other contributions expense for all periods included in this report represents multiple amounts to various plans that, individually, are deemed to be insignificant.
NOTE 19 – REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
United States | $ | 9,800 | $ | — | |||
Foreign | 14,241 | 2,005 | |||||
Total | $ | 24,041 | $ | 2,005 | |||
United States credit facility
In connection with the spin-off, we entered into a credit agreement on May 11, 2015 (the "Credit Agreement"). The Credit Agreement provides for a senior secured revolving credit facility in an aggregate amount of up to $600 million, which is scheduled to mature on June 30, 2020. The proceeds of loans under the Credit Agreement are available for working capital needs, issuance of letters of credit and other general corporate purposes. The $9.8 million balance at December 31, 2016 is included in "other noncurrent liabilities" in our consolidated combined balance sheet.
On February 24, 2017, we entered into Amendment No. 2 to Credit Agreement (the “Amendment” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (i) provide financial covenant relief by amending the definition of EBITDA (as defined in the Amended Credit Agreement) to exclude up to $98.1 million of losses for certain Renewable segment contracts for the year ended December 31, 2016; (ii) increase the maximum permitted leverage ratio to 3.50 to 1.00 during the covenant relief period; (iii) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to $300.0 million in the aggregate; (iv) increase the pricing for borrowings, letters of credit and commitment fees under the Amended Credit Agreement during the covenant relief period; (v) limit our ability to incur debt and liens during the covenant relief period; (vi) limit our ability to make acquisitions and investments in third parties during the covenant relief period; (vii) prohibit us from making dividends and stock redemptions during the covenant relief period; (viii) prohibit us from exercising the accordion described below during the covenant relief period; (ix) limit our financial letters of credit outstanding under the Amended Credit Agreement to $30.0 million during the covenant relief period; and (x) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales. The covenant relief period will end, at our election, when the conditions set forth in the Amendment are satisfied, but in no event earlier than the date on which we provide the compliance certificate for the fiscal quarter ending December 31, 2017.
Other than during the covenant relief period described above, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (i) $200 million plus (ii) an unlimited amount, so long as for any commitment increase under this subclause (ii) our senior secured leverage ratio (assuming the full amount of any
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commitment increase under this subclause (ii) is drawn) is equal to or less than 2.0 to 1.0 after giving pro forma effect thereto. During the covenant relief period described above, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period described above, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments. Following the covenant relief period described above, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
Loans outstanding under the Amended Credit Agreement bear interest at our option at either (i) the LIBOR rate plus (a) during the covenant relief period described above, a margin of 2.50% per year, and (b) following the covenant relief period described above, a margin ranging from 1.375% to 1.875% per year, or (ii) the base rate (the highest of the Federal Funds rate plus 0.5%, the one month LIBOR rate plus 1.0%, or the administrative agent's prime rate) plus (a) during the covenant relief period described above, a margin of 1.50% per year, and (b) following the covenant relief period described above, a margin ranging from 0.375% to 0.875% per year. A commitment fee is charged on the unused portions of the revolving credit facility, and that fee (A) during the covenant relief period described above, is 0.50% per year, and (B) following the covenant relief period described above, varies between 0.25% and 0.35% per year. Additionally, (I) during the covenant relief period, a letter of credit fee of 2.50% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.50% per year is charged with respect to the amount of each performance letter of credit outstanding, and (II) following the covenant relief period described above, a letter of credit fee of between 1.375% and 1.875% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of between 0.825% and 1.125% per year is charged with respect to the amount of each performance letter of credit outstanding. Following the covenant relief period described above, the applicable margin for loans, the commitment fee and the letter of credit fees set forth above vary quarterly based on our leverage ratio.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio (i) is 3.50 to 1.00 during the covenant relief period described above and (ii) is 3.00 to 1.00 following the covenant relief period described above (which ratio may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition). The minimum consolidated interest coverage ratio is 4.00 to 1.00 both during and following the covenant relief period described above. In addition, the Amended Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At December 31, 2016, usage under the Amended Credit Agreement consisted of $9.8 million in borrowings at an effective interest rate of 4.125%, $7.5 million of financial letters of credit and $89.1 million of performance letters of credit. After giving effect to the maximum leverage ratio, we had $228.8 million available borrowing capacity based on trailing-twelve month EBITDA, as defined in our Amended Credit Agreement, at December 31, 2016.
The Amended Credit Agreement generally includes customary events of default for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs under the Amended Credit Agreement, all obligations will immediately become due and payable. If any other event of default exists, the lenders will be permitted to accelerate the maturity of the obligations outstanding. If any event of default occurs, the lenders are permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. Additionally, if we are unable to make any of the representations and warranties in the Amended Credit Agreement, we will be unable to borrow funds or have letters of credit issued.
Foreign revolving credit facilities
Outside of the United States, we have unsecured revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. The revolving credit facilities in Turkey and India are a result of the July 1, 2016 acquisition of SPIG (see Note 4). These three foreign revolving credit facilities allow us to borrow up to $15.7 million in aggregate and each have a one year term. At December 31, 2016, we had $14.2 million in borrowings outstanding under
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these foreign revolving credit facilities at an effective weighted-average interest rate of 4.92%. If an event of default relating to bankruptcy or insolvency events was to occur, all obligations will become due and payable.
Letters of credit, bank guarantees and surety bonds
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States credit facility as of December 31, 2016 and December 31, 2015 was $255.2 million and $193.1 million, respectively. The increase is attributable to the July 1, 2016 acquisition of SPIG.
We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of December 31, 2016, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $527.9 million.
Universal acquisition
In order to purchase Universal on January 11, 2017, we borrowed $55 million under the United States credit facility in 2017. The acquisition did not materially change the level of bank guarantees, letters of credit or surety bonds that were outstanding at December 31, 2016.
NOTE 20 – CONTINGENCIES
Litigation
On February 28, 2014, the Arkansas River Power Authority ("ARPA") filed suit against Babcock & Wilcox Power Generation Group, Inc. (now known as The Babcock & Wilcox Company and referred to herein as “BW PGG”) in the United States District Court for the District of Colorado (Case No. 14-cv-00638-CMA-NYW) alleging breach of contract, negligence, fraud and other claims arising out of BW PGG's delivery of a circulating fluidized bed boiler and related equipment used in the Lamar Repowering Project pursuant to a 2005 contract.
A jury trial took place in mid-November 2016. Some of ARPA’s claims were dismissed by the judge during the trial. The jury’s verdict on the remaining claims was issued on November 21, 2016. The jury found in favor of B&W with respect to ARPA’s claims of fraudulent concealment and negligent misrepresentation and on one of ARPA’s claims of breach of contract. The jury found in favor of ARPA on the three remaining claims for breach of contract and awarded damages totaling $4.2 million, which exceeded the previous $2.3 million accrual we established in 2012 by $1.9 million.
ARPA has requested that pre-judgment interest of $4.1 million plus post-judgment interest at a rate of 0.77% compounded annually be added to the judgment, together with certain litigation costs. This request is pending before the court, and we believe that a substantial amount of interest and costs claimed by ARPA are without factual or legal support. Accordingly, we believe an award of some interest is possible, but that it is not probable that the amount claimed by ARPA will be awarded; therefore, we have not accrued any portion of interest in the consolidated financial statements. B&W has requested the court to modify the verdict and we will continue to evaluate options for appeal upon final ruling on the parties’ motions to modify the award of damages. We have posted a bond pending resolution of post-trial matters.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
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NOTE 21 – DERIVATIVE FINANCIAL INSTRUMENTS
We have designated all of our foreign currency exchange ("FX") forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At December 31, 2016 and 2015, we had deferred approximately $0.8 million and $1.8 million, respectively, of net gains on these derivative financial instruments in AOCI.
At December 31, 2016, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled $177.4 million at December 31, 2016 with maturities extending to November 2018. These instruments consist primarily of contracts to purchase or sell euros and British pounds sterling. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions party to our credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our United States credit facility.
The following tables summarize our derivative financial instruments:
Asset and Liability Derivatives | |||||||
(in thousands) | December 31, 2016 | December 31, 2015 | |||||
Derivatives designated as hedges: | |||||||
Foreign exchange contracts: | |||||||
Location of FX forward contracts designated as hedges: | |||||||
Accounts receivable-other | $ | 3,805 | $ | 1,545 | |||
Other assets | 665 | 688 | |||||
Accounts payable | 1,012 | 17 | |||||
Other liabilities | 213 | — | |||||
Derivatives not designated as hedges: | |||||||
Foreign exchange contracts: | |||||||
Location of FX forward contracts not designated as hedges: | |||||||
Accounts receivable-other | $ | 105 | $ | 72 | |||
Accounts payable | 403 | 101 | |||||
Other liabilities | 7 | — | |||||
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The effects of derivatives on our financial statements are outlined below:
Year Ended December 31, | |||||||
(in thousands) | 2016 | 2015 | |||||
Derivatives designated as hedges: | |||||||
Cash flow hedges | |||||||
Foreign exchange contracts | |||||||
Amount of gain (loss) recognized in other comprehensive income | $ | 2,208 | $ | 2,920 | |||
Effective portion of gain (loss) reclassified from AOCI into earnings by location: | |||||||
Revenues | 4,624 | 546 | |||||
Cost of operations | 195 | 155 | |||||
Other-net | (1,221 | ) | (24 | ) | |||
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location: | |||||||
Other-net | 4,518 | 252 | |||||
Derivatives not designated as hedges: | |||||||
Forward contracts | |||||||
Gain (loss) recognized in income by location: | |||||||
Other-net | $ | (872 | ) | $ | 206 | ||
NOTE 22 – FAIR VALUE MEASUREMENTS
The following table summarizes our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic Fair Value Measurements and Disclosures).
(in thousands) | |||||||||||||||
Available-for-sale securities | December 31, 2016 | Level 1 | Level 2 | Level 3 | |||||||||||
Commercial paper | $ | 6,734 | $ | — | $ | 6,734 | $ | — | |||||||
Certificates of deposit | 2,251 | — | 2,251 | — | |||||||||||
Mutual funds | 1,152 | — | 1,152 | — | |||||||||||
Corporate bonds | 750 | 750 | — | — | |||||||||||
U.S. Government and agency securities | 7,104 | 7,104 | — | — | |||||||||||
Total fair value of available-for-sale securities | $ | 17,991 | $ | 7,854 | $ | 10,137 | $ | — | |||||||
The following is a summary of our available-for-sale securities at fair value at December 31, 2015.
(in thousands) | |||||||||||||||
Available-for-sale securities | December 31, 2015 | Level 1 | Level 2 | Level 3 | |||||||||||
Commercial paper | $ | 3,996 | $ | — | $ | 3,996 | $ | — | |||||||
Mutual funds | 1,093 | — | 1,093 | — | |||||||||||
Total fair value of available-for-sale securities | $ | 5,089 | $ | — | $ | 5,089 | $ | — | |||||||
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Derivatives | December 31, 2016 | December 31, 2015 | |||||
Forward contracts to purchase/sell foreign currencies | $2,940 | $2,186 | |||||
Available-for-sale securities
We estimate the fair value of available-for-sale securities based on quoted market prices. Our investments in available-for-sale securities are presented in "other assets" on our consolidated balance sheets.
Derivatives
Derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments.
Other financial instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
• | Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying consolidated balance sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature. |
• | Revolving debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instruments approximated their carrying value at December 31, 2016 and December 31, 2015. |
Non-recurring fair value measurements
The purchase price allocation associated with the July 1, 2016 SPIG acquisition required significant fair value measurements using unobservable inputs ("Level 3" inputs as defined in the fair value hierarchy established by FASB Topic Fair Value Measurements and Disclosures). The fair value of the acquired intangible assets was determined using the income approach (see Note 4).
NOTE 23 – SHARE REPURCHASES
On August 4, 2015, we announced that our board of directors authorized the repurchase of an indeterminate number of our shares of common stock in the open market at an aggregate market value of up to $100 million. We repurchased 1.3 million shares of our common stock for $24.3 million during the year ended December 31, 2015, and 1.6 million shares of our common stock for $75.7 million during the year ended December 31, 2016, which completed this program.
On August 4, 2016, we announced that our board of directors authorized the repurchase of an indeterminate number of our shares of common stock in the open market at an aggregate market value of up to $100 million over the succeeding twenty-four months. As of December 31, 2016, we have not made any share repurchases under the August 4, 2016 share repurchase authorization.
Any shares purchased that were not part of our publicly announced plan are related to repurchases of common stock pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.
NOTE 24 – SUPPLEMENTAL CASH FLOW INFORMATION
During the twelve-months ended December 31, 2016, 2015 and 2014, we paid the following for income taxes:
(in thousands) | 2016 | 2015 | 2014 | |||||||||
Income taxes (net of refunds) | $ | 10,781 | $ | 15,008 | $ | 7,951 | ||||||
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During the twelve-months ended December 31, 2016, 2015 and 2014, we recognized the following non-cash activity in our consolidated and combined financial statements:
(in thousands) | 2016 | 2015 | 2014 | |||||||||
Accrued capital expenditures in accounts payable | $ | 2,751 | $ | 568 | $ | 1,680 | ||||||
NOTE 25 – RELATED PARTY TRANSACTIONS
Prior to June 30, 2015, we were a party to transactions with our former Parent and its subsidiaries in the normal course of operations. After the spin-off, we no longer consider the former Parent to be a related party. Transactions with our former Parent prior to the spin-off included the following:
Year Ended December 31, | |||||||
(in thousands) | 2015 | 2014 | |||||
Sales to our former Parent | $ | 911 | $ | 5,896 | |||
Corporate administrative expenses | 35,343 | 73,329 | |||||
Guarantees
Our former Parent had outstanding performance guarantees for various projects executed by us in the normal course of business. As of April 21, 2016, these guarantees had all been terminated.
Net transfers from former Parent
Net transfers from former Parent represent the change in our former Parent's historical investment in us. It primarily includes the net effect of cost allocations from transactions with our former Parent, sales to our former Parent, and the net transfers of cash and assets to our former Parent prior to the spin-off. After the spin-off transaction on June 30, 2015, there have been no significant transfers to or from our former Parent. These transactions included the following:
Year Ended December 31, | |||||||
(in thousands) | 2015 | 2014 | |||||
Sales to former Parent | $ | 911 | $ | 5,896 | |||
Corporate administrative expenses | 35,343 | 73,329 | |||||
Income tax allocation | 11,872 | 3,378 | |||||
Acquisition of business, net of cash acquired | — | 127,704 | |||||
Cash pooling and general financing activities | (91,015 | ) | 14,261 | ||||
Cash contribution received at spin-off | 125,300 | — | |||||
Net transfer from former Parent per statement of cash flows | $ | 80,589 | $ | 213,137 | |||
Non-cash items: | |||||||
Net transfer of assets and liabilities | $ | 44,706 | $ | (62 | ) | ||
Distribution of Nuclear Energy segment | $ | (47,839 | ) | $ | — | ||
Net transfer from former Parent per statement of shareholders' equity | $ | 77,456 | $ | 213,075 | |||
NOTE 26 – DISCONTINUED OPERATIONS
We distributed assets and liabilities totaling $47.8 million associated with the NE segment to BWC in conjunction with the spin-off. We received corporate allocations from our former Parent as described in Note 1, which totaled $2.7 million, and $5.3 million for the years ended December 31, 2015 and 2014, respectively. Though these allocations relate to our
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discontinued NE segment, they are included as part of continuing operations because allocations are not eligible for inclusion in discontinued operations.
The following table presents selected financial information regarding the results of operations of our former NE segment through June 30, 2015, the date it was discontinued:
Six Months Ended June 30, | Twelve Months Ended December 31, | ||||||
(in thousands) | 2015 | 2014 | |||||
Revenues | $ | 53,064 | $ | 103,690 | |||
Income (loss) before income tax expense | 3,358 | (19,072 | ) | ||||
Income tax expense (benefit) | 555 | (4,800 | ) | ||||
Income (loss) from discontinued operations, net of tax | $ | 2,803 | $ | (14,272 | ) | ||
NOTE 27 – OPERATING LEASES
Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31, 2016 are as follows (in thousands):
Fiscal Year Ending December 31, 2016 | Amount | ||
2017 | $ | 5,224 | |
2018 | $ | 3,833 | |
2019 | $ | 2,433 | |
2020 | $ | 1,239 | |
2021 | $ | 425 | |
Thereafter | $ | 35 | |
Total rental expense for the years ended December 31, 2016, 2015 and 2014, was $8.3 million, $13.5 million and $6.9 million, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which is material.
NOTE 28 - QUARTERLY FINANCIAL DATA
The following tables set forth selected unaudited quarterly financial information for the years ended December 31, 2016 and 2015:
(in thousands, except per share amounts) | Year Ended December 31, 2016 Quarter Ended | ||||||||||||||
March 31, 2016 | June 30, 2016 | Sept. 30, 2016 | Dec. 31, 2016 | ||||||||||||
Revenues | $ | 404,116 | $ | 383,208 | $ | 410,955 | $ | 379,984 | |||||||
Gross profit | $ | 80,156 | $ | 26,052 | $ | 73,757 | $ | (848 | ) | ||||||
Operating income (loss) (1) | $ | 17,266 | $ | (72,585 | ) | $ | 11,133 | $ | (58,587 | ) | |||||
Equity in income (loss) of investees | $ | 2,676 | $ | (616 | ) | $ | 2,827 | $ | 11,553 | ||||||
Net income (loss) attributable to shareholders | $ | 10,507 | $ | (63,490 | ) | $ | 8,894 | $ | (71,560 | ) | |||||
Earnings per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing | $ | 0.20 | $ | (1.25 | ) | $ | 0.18 | $ | (1.47 | ) | |||||
Discontinued | $ | — | $ | — | $ | — | $ | — | |||||||
Diluted | |||||||||||||||
Continuing | $ | 0.20 | $ | (1.25 | ) | $ | 0.18 | $ | (1.47 | ) | |||||
Discontinued | $ | — | $ | — | $ | — | $ | — | |||||||
(1) | Includes equity in income of investees. |
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(in thousands, except per share amounts) | Year Ended December 31, 2015 Quarter Ended | ||||||||||||||
March 31, 2015 | June 30, 2015 | Sept. 30, 2015 | Dec. 31, 2015 | ||||||||||||
Revenues | $ | 397,155 | $ | 437,485 | $ | 419,977 | $ | 502,678 | |||||||
Gross profit | $ | 83,397 | $ | 81,884 | $ | 77,922 | $ | 64,954 | |||||||
Operating income (loss) (1) | $ | 17,343 | $ | 4,859 | $ | 9,632 | $ | (9,973 | ) | ||||||
Equity in income (loss) of investees | $ | (2,071 | ) | $ | 967 | $ | 1,047 | $ | (185 | ) | |||||
Net income (loss) attributable to shareholders | $ | 12,689 | $ | 5,487 | $ | 6,169 | $ | (5,204 | ) | ||||||
Earnings per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing | $ | 0.21 | $ | 0.08 | $ | 0.11 | $ | (0.10 | ) | ||||||
Discontinued | $ | 0.03 | $ | 0.02 | $ | — | $ | — | |||||||
Diluted | |||||||||||||||
Continuing | $ | 0.21 | $ | 0.08 | $ | 0.11 | $ | (0.10 | ) | ||||||
Discontinued | $ | 0.03 | $ | 0.02 | $ | — | $ | — | |||||||
(1) | Includes equity in income of investees. |
We recognize actuarial gains and losses for our pension and postretirement benefit plans into earnings at least annually (on December 31) as a component of net periodic benefit cost. During 2016, we had interim mark to market adjustments related to plan settlements and a plan curtailment. The effect of the interim mark to market adjustments on pre-tax income in the quarters ended June 30, 2016 and September 30, 2016, was a pre-tax charge of $30.0 million and $0.5 million, respectively. In the quarter ended December 31, 2016, we recognized a pre-tax gain of $6.4 million related to net mark to market adjustments for all of our benefit plans. Mark to market adjustments for the quarter and year ended December 31, 2015 resulted in a $40.2 million pre-tax loss.
In the second and fourth quarters of 2016, we recognized significant losses related to changes in the estimate of the forecasted cost to complete renewable energy contracts, which are more fully described in Note 6 to the consolidated and combined financial statements.
NOTE 29 – NEW ACCOUNTING STANDARDS
New accounting standards that could affect our financial statements in the future are summarized as follows:
In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-1, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new accounting standard is effective for us beginning in 2018, but early adoption is permitted. The new accounting standard requires investments such as available-for-sale securities to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). With adoption of this standard, lessees will have to recognize almost all leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. The new accounting standard is effective for us beginning in 2019. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The FASB amended its new revenue recognition guidance on determining whether an entity is a principal or an agent in an arrangement (i.e., whether it should report revenue gross or net). In addition, the FASB voted to propose eight technical corrections related to the revenue standard, the majority of which involve consequential amendments to other accounting topics affected by the revenue standard. In addition to ASU 2016-08, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the
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March 3, 2016 EITF Meeting. This update finalized the guidance in the new revenue standards regarding collectability, noncash consideration, presentation of sales tax and transition for customer contracts. The new accounting standards associated with revenue recognition are effective for us beginning in 2018. We are currently assessing the impact that adopting this new accounting standard will have on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The new accounting standard is effective for us beginning in 2017. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
NOTE 30 - SUBSEQUENT EVENTS
On January 11, 2017, we acquired Universal, for approximately $55 million in cash, funded primarily by borrowings under our United States revolving credit facility. The acquisition will include post-closing adjustments related to differences in actual net indebtedness and transaction expenses compared to pre-close estimates. We expect these adjustments will be made before the end of the first quarter of 2017. We plan to account for the Universal acquisition using the acquisition method, whereby all of the assets acquired and liabilities assumed will be recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill. Purchase price allocation adjustments associated with the Universal acquisition are expected to be finalized during the first half of 2017.
Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures, and Universal's annual sales were approximately $80 million for the year ended December 31, 2016. They employ approximately 460 people, mainly in the U.S. and Mexico. The acquisition of Universal is consistent with B&W's goal to grow and diversify its technology-based offerings with new products and services in the industrial markets that are complementary to our core businesses.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, management of B&W concluded that as of December 31, 2016 the design and operation of our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and such information is accumulated and communicated to management, including its principal executives and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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Management's Report on Internal Control Over Financial Reporting
B&W's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, policies and procedures for conducting business, information systems for processing transactions and an internal audit department. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting and actions are taken to remediate identified internal control deficiencies. Our procedures for financial reporting include the involvement of senior management, our Audit and Finance Committee and our staff of financial and legal professionals. Our financial reporting process and associated internal controls were designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America.
Management, with the participation of our principal executive and financial officers, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance as to its effectiveness, and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. Based on our assessment, management has concluded that B&W's internal control over financial reporting was effective at the reasonable assurance level described above as of December 31, 2016.
On July 1, 2016, we acquired SPIG S.p.A. See Note 4 – SPIG acquisition of our consolidated financial statements for additional information. SPIG represented approximately 9% of our consolidated total assets at December 31, 2016 and approximately 6% of our consolidated revenues for the period from July 1, 2016 through December 31, 2016. As permitted by the Securities and Exchange Commission, management has elected to exclude SPIG S.p.A. from its assessment of internal control over financial reporting as of December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited our consolidated financial statements included in this Annual Report on Form 10-K. Deloitte & Touche LLP’s report on our internal control over financial reporting is included in this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Babcock & Wilcox Enterprises, Inc.:
We have audited the internal control over financial reporting of Babcock & Wilcox Enterprises, Inc. (the "Company") as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at SPIG S.p.A., which was acquired on July 1, 2016 and whose financial statements constitute 9% of total assets and 6% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at SPIG S.p.A. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated and combined financial statements as of and for the year ended December 31, 2016 of the Company and our report dated February 28, 2017, which report expressed an unqualified opinion on those financial statements and includes an explanatory paragraph related to the completion of the spin-off of the Company effective June 30, 2015 by The Babcock and Wilcox Company.
/S/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 28, 2017
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Changes in Internal Control Over Financial Reporting
Other than explained below, no change occurred in our internal control over financial reporting during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On July 1, 2016, we acquired SPIG S.p.A. As permitted by the Securities and Exchange Commission, management has elected to exclude SPIG S.p.A. from its assessment of internal control over financial reporting as of December 31, 2016. Our integration of SPIG S.p.A.'s processes and systems could cause changes to our internal controls over financial reporting in future periods.
Item 9B. OTHER INFORMATION
Amended credit agreement
On June 30, 2015, we obtained a credit agreement, dated as of May 11, 2015 ("Credit Agreement"), among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as administrative agent, and the other lenders party thereto, in connection with the spin-off of Babcock & Wilcox Enterprises, Inc. from The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). The Credit Agreement provides for a senior secured revolving credit facility in an aggregate amount of up to $600 million, which is scheduled to mature on June 30, 2020. The proceeds of loans under the Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit.
On February 24, 2017, we entered into Amendment No. 2 to Credit Agreement (the “Amendment” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (i) provide financial covenant relief by amending the definition of EBITDA (as defined in the Amended Credit Agreement) to exclude up to $98.1 million of losses for certain Renewable segment contracts for the year ended December 31, 2016; (ii) increase the maximum permitted leverage ratio to 3.50 to 1.00 during the covenant relief period; (iii) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to $300.0 million in the aggregate; (iv) increase the pricing for borrowings, letters of credit and commitment fees under the Amended Credit Agreement during the covenant relief period; (v) limit our ability to incur debt and liens during the covenant relief period; (vi) limit our ability to make acquisitions and investments in third parties during the covenant relief period; (vii) prohibit us from making dividends and stock redemptions during the covenant relief period; (viii) prohibit us from exercising the accordion described below during the covenant relief period; (ix) limit our financial letters of credit outstanding under the Amended Credit Agreement to $30.0 million during the covenant relief period; and (x) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales. The covenant relief period will end, at our election, when the conditions set forth in the Amendment are satisfied, but in no event earlier than the date on which we provide the compliance certificate for the fiscal quarter ending December 31, 2017.
Other than during the covenant relief period described above, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (i) $200 million plus (ii) an unlimited amount, so long as for any commitment increase under this subclause (ii) our senior secured leverage ratio (assuming the full amount of any commitment increase under this subclause (ii) is drawn) is equal to or less than 2.0 to 1.0 after giving pro forma effect thereto. During the covenant relief period described above, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period described above, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such
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prepayments. Following the covenant relief period described above, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
Loans outstanding under the Amended Credit Agreement bear interest at our option at either (i) the LIBOR rate plus (a) during the covenant relief period described above, a margin of 2.50% per year, and (b) following the covenant relief period described above, a margin ranging from 1.375% to 1.875% per year, or (ii) the base rate (the highest of the Federal Funds rate plus 0.5%, the one month LIBOR rate plus 1.0%, or the administrative agent's prime rate) plus (a) during the covenant relief period described above, a margin of 1.50% per year, and (b) following the covenant relief period described above, a margin ranging from 0.375% to 0.875% per year. A commitment fee is charged on the unused portions of the revolving credit facility, and that fee (A) during the covenant relief period described above, is 0.50% per year, and (B) following the covenant relief period described above, varies between 0.25% and 0.35% per year. Additionally, (I) during the covenant relief period, a letter of credit fee of 2.50% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.50% per year is charged with respect to the amount of each performance letter of credit outstanding, and (II) following the covenant relief period described above, a letter of credit fee of between 1.375% and 1.875% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of between 0.825% and 1.125% per year is charged with respect to the amount of each performance letter of credit outstanding. Following the covenant relief period described above, the applicable margin for loans, the commitment fee and the letter of credit fees set forth above vary quarterly based on our leverage ratio.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio (i) is 3.50 to 1.00 during the covenant relief period described above and (ii) is 3.00 to 1.00 following the covenant relief period described above (which ratio may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition). The minimum consolidated interest coverage ratio is 4.00 to 1.00 both during and following the covenant relief period described above. In addition, the Amended Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At December 31, 2016, usage under the Amended Credit Agreement consisted of $9.8 million in borrowings at an effective interest rate of 4.125%, $7.5 million of financial letters of credit and $89.1 million of performance letters of credit. After giving effect to the maximum leverage ratio, we had $228.8 million available borrowing capacity based on trailing-twelve month EBITDA, as defined in our Amended Credit Agreement, at December 31, 2016.
The Amended Credit Agreement generally includes customary events of default for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs under the Amended Credit Agreement, all obligations will immediately become due and payable. If any other event of default exists, the lenders will be permitted to accelerate the maturity of the obligations outstanding. If any event of default occurs, the lenders are permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. Additionally, if we are unable to make any of the representations and warranties in the Amended Credit Agreement, we will be unable to borrow funds or have letters of credit issued.
Certain of the lenders under the Amended Credit Agreement (and their respective subsidiaries or affiliates) have in the past provided, are currently providing or may in the future provide, investment banking, cash management, underwriting, lending, commercial banking, trust, leasing services, foreign exchange and other advisory services to, or engage in transactions with, us and our subsidiaries or affiliates. These parties have received, and may in the future receive, customary compensation from us and our subsidiaries or affiliates, for such services.
The foregoing description of the Amended Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Credit Agreement, a copy of which is filed as Exhibit 10.27 to this Annual Report on Form 10-K and incorporated by reference herein.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to directors is incorporated by reference to the material appearing under the heading "Election of Directors" in the Proxy Statement for our 2017 Annual Meeting of Stockholders. The information required by this item with respect to compliance with section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated by reference to the material appearing under the heading "Section 16(a) Beneficial Ownership Compliance" in
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the Proxy Statement for our 2017 Annual Meeting of Stockholders. The information required by this item with respect to the Audit Committee and Audit and Finance Committee financial experts is incorporated by reference to the material appearing in the "Director Independence" and "Audit and Finance Committee" sections under the heading "Corporate Governance – Board of Directors and Its Committees" in the Proxy Statement for our 2017 Annual Meeting of Stockholders.
We have adopted a Code of Business Conduct for our employees and directors, including, specifically, our chief executive officer, our chief financial officer, our chief accounting officer, and our other executive officers. Our code satisfies the requirements for a "code of ethics" within the meaning of SEC rules. A copy of the code is posted on our web site, www.babcock.com under "Investor Relations – Corporate Governance – Highlights." We intend to disclose promptly on our website any amendments to, or waivers of, the code covering our chief executive officer, chief financial officer and chief accounting officer.
EXECUTIVE OFFICERS
Our executive officers and their ages as of February 20, 2017, are as follows:
Name | Age | Position |
Jenny L. Apker | 59 | Senior Vice President and Chief Financial Officer |
Mark A. Carano | 47 | Senior Vice President, Corporate Development and Industrial Finance |
E. James Ferland | 50 | Chairman and Chief Executive Officer |
Elias Gedeon | 57 | Senior Vice President and Chief Business Development Officer |
J. André Hall | 51 | Senior Vice President, General Counsel and Corporate Secretary |
Daniel W. Hoehn | 38 | Vice President, Controller and Chief Accounting Officer |
Mark S. Low | 60 | Senior Vice President, Power |
Jimmy B. Morgan | 48 | Senior Vice President, Renewable |
James J. Muckley | 58 | Senior Vice President, Operations |
Francesco Racheli | 44 | Senior Vice President, Babcock & Wilcox SPIG |
Kenneth Zak | 58 | Senior Vice President, Babcock & Wilcox MEGTEC |
Jenny L. Apker serves as our Senior Vice President and Chief Financial Officer. Prior to the spin-off, Ms. Apker served as Vice President, Treasurer and Investor Relations of BWC since August 2012 and, prior to that time, served as Vice President and Treasurer since joining BWC in June 2010. Previously, Ms. Apker served as Vice President and Treasurer with Dex One Corporation (formerly R.H. Donnelley Corporation), a marketing services company, from May 2003 until June 2010.
Mark A. Carano serves as our Senior Vice President, Corporate Development and Industrial Finance. Prior to the spin-off, Mr. Carano served as Senior Vice President and Chief Corporate Development Officer of BWC since August 2013. Prior to joining BWC in June 2013, Mr. Carano served as a Managing Director in the Investment Banking Group of Bank of America Merrill Lynch since 2006. Mr. Carano also previously held positions with the Investment Banking Group of Deutsche Bank.
E. James Ferland serves as our Chairman and Chief Executive Officer. Prior to the spin-off, Mr. Ferland was President and Chief Executive Officer of BWC since April 2012. Prior to joining BWC, Mr. Ferland served as President of the Americas division for Westinghouse Electric Company, LLC, a nuclear energy company and group company of Toshiba Corporation, from 2010 through March 2012. From 2007 to 2010, Mr. Ferland worked for PNM Resources, Inc., a holding company of utilities providing electricity and energy products and services, where he held positions as Senior Vice President of Utility Operations and Senior Vice President of Energy Resources. Previously, Mr. Ferland held various senior management and engineering positions at Westinghouse Electric Company, Louisiana Energy Services/URENCO, Duke Engineering and Services, Carolina Power & Light and General Dynamics. Mr. Ferland has also served on the board of directors of Actuant Corporation since August 2014.
Elias Gedeon serves as our Senior Vice President and Chief Business Development Officer. Prior to the spin-off, Mr. Gedeon served as Senior Vice President and Chief Business Development Officer of BWC since May 2014. Mr. Gedeon has more than 30 years of experience in the power generation industry and has held various sales, operations and P&L leadership positions in the U.S. and overseas. He joined BWC from Alstom Power, Inc., a subsidiary of energy and transport manufacturer Alstom, where he served as Vice President, Global Sales and Marketing - Boiler Group since 2009 and
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previously as Vice President of Sales, Americas. Prior to joining Alstom, Mr. Gedeon served in sales and operations roles of increasing responsibility with Foster Wheeler Power Group, Inc., including Executive Vice President, Global Sales & Marketing.
J. André Hall serves as our Senior Vice President, General Counsel and Corporate Secretary. Prior to the spin-off, Mr. Hall served as Assistant General Counsel, Transactions and Compliance of BWC since August 2013. Prior to joining BWC, Mr. Hall served in various roles of increasing responsibility with Goodrich Corporation, an aerospace manufacturing company, most recently as Vice President of Business Conduct and Chief Ethics Officer from October 2009 until July 2012 when it was acquired by United Technologies Corporation. For the five years prior to becoming Chief Ethics Officer, Mr. Hall served as the segment general counsel for one of Goodrich Corporation’s multi-billion dollar operating segments.
Daniel W. Hoehn serves as our Vice President, Controller and Chief Accounting Officer. Mr. Hoehn joined BWC in March 2015. Formerly, Mr. Hoehn was Vice President and Controller at Chiquita Brands International, Inc., a producer and distributor of bananas and other produce, responsible for financial reporting for Chiquita’s operations across three continents. From 2010 to 2013, he was Assistant Corporate Controller, after serving as Manager, Financial Reporting, from 2007 to 2010. Prior to joining Chiquita, Mr. Hoehn was a senior manager in the audit practice at KPMG, LLP.
Mark S. Low serves as our Senior Vice President, Power. From July 2015 to June 2016, he served as Senior Vice President, Global Services. Prior to the spinoff, Mr. Low was Vice President and General Manager of BWC’s Global Services Division from 2013 to March 2015. Previously, from 2012 to 2013, he was Vice President and General Manager of BWC’s Environmental Products and Services Division, responsible for all aspects of our environmental products and services business. From 2007 to 2012, he served as BWC's Vice President, Service Projects, in which he led all technical and commercial aspects of our service projects business including project management, forecasting, costing, cost forecasting, and warranty resolution.
Jimmy B. Morgan serves as our Senior Vice President, Renewable since December 2016. He is responsible for the company's renewable energy business, including its Babcock & Wilcox Volund subsidiary and Babcock & Wilcox's operations and maintenance services businesses. From August 2016 to December 2016, he served as Senior Vice President, Operations. He was Vice President, Operations from May 2016 to August 2016 and was Vice President and General Manager of Babcock & Wilcox Construction Co., Inc. from February 2016 to May 2016. Before joining Babcock & Wilcox, he was President for Allied Technical Resources, Inc., a technical staffing company, from September 2013 to January 2016. Previous positions included serving as Chief Operating Officer with BHI Energy, Vice President of Installation and Modification Services with Westinghouse Electric Company, and as Managing Director for AREVA T&D. He began is career with Duke Energy.
James J. Muckley has served as our Senior Vice President, Operations since December 2016 and is responsible for the Company's manufacturing operations, Global Project Management, Quality and Environmental, Health, Safety & Security functions. He is also responsible for Babcock & Wilcox Construction Co., LLC. From June 2016 to December 2016, he was Vice President, Global Parts and Field Engineering Services in the Company's Power segment. Prior to that, he was Vice President, Parts from January 2016 to May 2016, General Manager, Replacement Parts from November 2012 to December 2015, and Operations/Alliance Manager, Replacement Parts from March 2002 to October 2012.
Francesco Racheli serves as our Senior Vice President, Babcock & Wilcox SPIG, a leading provider of cooling systems worldwide that we acquired on July 1, 2016. Prior to the acquisition, Mr. Racheli was CEO of SPIG S.p.A., a position he held from 2014 until joining the company in 2016. From 2009 to 2014, he served as CEO of Finder Group, a global pump manufacturer for the energy and oil and gas industries. Formerly, Mr. Racheli spent 12 years with General Electric Corporation in various management roles in Europe and the United States.
Kenneth Zak serves as our Senior Vice-President, Babcock & Wilcox MEGTEC. From June 2016 to December 2016, he served as Senior Vice President, Industrial, and from July 2015 to June 2016 as Senior Vice President, Industrial Environmental. From December 2012 through June 2015, Mr. Zak served as the Senior Vice President for Business Operations for MEGTEC where he was responsible for MEGTEC’s Environmental Solutions business worldwide as well as sales and business development for the Engineered Products business. Previously, from 2003 to 2012, Mr. Zak was Vice President of the Industrial & Environmental Products Group for MEGTEC, responsible for business teams in the Americas and Asia and drove strategy deployment activities and annual improvement priorities on a global basis. Mr. Zak also previously held business development and marketing positions at W. R. Grace & Co. and Owens-Corning Fiberglass.
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Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the material appearing under the headings "Compensation Discussion and Analysis," "Compensation of Directors," "Compensation of Executive Officers," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" in the Proxy Statement for our 2017 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information on our equity compensation plans as of December 31, 2016:
Equity Compensation Plan Information
Plan Category: | Equity compensation plans approved by security holders | ||
Number of securities to be issued upon exercise of outstanding options and rights | 3,847,090 | ||
Weighted-average exercise price of outstanding options and rights | $ | 18.55 | |
Number of securities remaining available for future issuance | 3,281,394 | ||
The other information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement for our 2017 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference to the material appearing under the headings "Corporate Governance – Director Independence" and "Certain Relationships and Related Transactions" in the Proxy Statement for our 2017 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the material appearing under the heading "Ratification of Appointment of Independent Registered Public Accounting Firm for Year Ending December 31, 2016" in the Proxy Statement for our 2017 Annual Meeting of Stockholders.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report or incorporated by reference:
1. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated and Combined Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated and Combined Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated and Combined Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated and Combined Financial Statements for the Years Ended December 31, 2016, 2015 and 2014
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2. CONSOLIDATED AND COMBINED FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made of the applicable regulations of the SEC have been omitted because they are not required under the relevant instructions or because the required information is included in the financial statements or the related footnotes contained in this report.
3. EXHIBITS
Exhibit Number | Description | |
2.1* | Master Separation Agreement, dated as of June 8, 2015, between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 2.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
3.2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.1 | Tax Sharing Agreement, dated as of June 8, 2015, by and between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.2 | Employee Matters Agreement, dated as of June 8, 2015, by and between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.3 | Transition Services Agreement, dated as of June 8, 2015, between The Babcock & Wilcox Company, as service provider, and Babcock & Wilcox Enterprises, Inc., as service receiver (incorporated by reference to Exhibit 10.3 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.4 | Transition Services Agreement, dated as of June 8, 2015, between Babcock & Wilcox Enterprises, Inc., as service provider, and The Babcock & Wilcox Company, as service receiver (incorporated by reference to Exhibit 10.4 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.5 | Assumption and Loss Allocation Agreement, dated as of June 19, 2015, by and among ACE American Insurance Company and the Ace Affiliates (as defined therein), Babcock & Wilcox Enterprises, Inc. and The Babcock & Wilcox Company (incorporated by reference to Exhibit 10.5 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.6 | Reinsurance Novation and Assumption Agreement, dated as of June 19, 2015, by and among ACE American Insurance Company and the Ace Affiliates (as defined therein), Creole Insurance Company and Dampkraft Insurance Company (incorporated by reference to Exhibit 10.6 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
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10.7 | Novation and Assumption Agreement, dated as of June 19, 2015, by and among The Babcock & Wilcox Company, Babcock & Wilcox Enterprises, Inc., Dampkraft Insurance Company and Creole Insurance Company (incorporated by reference to Exhibit 10.7 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.8† | Amended and Restated 2015 Long-Term Incentive Plan of Babcock & Wilcox Enterprises, Inc. (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. current Report on Form 8-K filed May 6, 2016 (File No. 001-36876)) | |
10.9† | Babcock & Wilcox Enterprises, Inc. Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.10† | Babcock & Wilcox Enterprises, Inc. Management Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.11† | Supplemental Executive Retirement Plan of Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.11 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.12† | Babcock & Wilcox Enterprises, Inc. Defined Contribution Restoration Plan (incorporated by reference to Exhibit 10.12 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.13 | Intellectual Property Agreement, dated as of June 26, 2015, between Babcock & Wilcox Power Generation Group, Inc. and BWXT Foreign Holdings, LLC (incorporated by reference to Exhibit 10.13 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.14 | Intellectual Property Agreement, dated as of June 27, 2015, between Babcock & Wilcox Technology, Inc. and Babcock & Wilcox Investment Company (incorporated by reference to Exhibit 10.14 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.15 | Intellectual Property Agreement, dated as of May 29, 2015, between Babcock & Wilcox Canada Ltd. and B&W PGG Canada Corp. (incorporated by reference to Exhibit 10.15 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.16 | Intellectual Property Agreement, dated as of May 29, 2015, between Babcock & Wilcox mPower, Inc. and Babcock & Wilcox Power Generation Group, Inc. (incorporated by reference to Exhibit 10.16 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.17 | Intellectual Property Agreement, dated as of June 26, 2015, between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.17 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
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10.18 | Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the Other Lenders Party Thereto (incorporated by reference to Exhibit 10.18 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)) | |
10.19† | Form of Change-in-Control Agreement, by and between Babcock & Wilcox Enterprises, Inc. and certain officers for officers elected prior to August 4, 2016 (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-36876)) | |
10.20† | Form of Restricted Stock Grant Agreement (Spin-off Award) (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)) | |
10.21† | Form of Restricted Stock Units Grant Agreement (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)) | |
10.22† | Form of Stock Option Grant Agreement (incorporated by reference to Exhibit 10.3 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)) | |
10.23† | Form of Performance Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.23 to the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-36876)) | |
10.24 | Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.24 to the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-36876)) | |
10.25† | Form of Change-in-Control Agreement, by and between Babcock & Wilcox Enterprises, Inc. and certain officers for officers elected on or after August 4, 2016 (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-36876)) | |
10.26 | Amendment No. 1 dated June 10, 2016 to Credit Agreement, dated May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, and the other Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (File No. 001-36876)) | |
10.27 | Amendment No. 2 dated February 24, 2017 to Credit Agreement, dated May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, and the other Lenders party thereto. | |
21.1 | Significant Subsidiaries of the Registrant | |
23.1 | Consent of Deloitte & Touche LLP | |
31.1 | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer | |
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32.1 | Section 1350 certification of Chief Executive Officer | |
32.2 | Section 1350 certification of Chief Financial Officer | |
95 | Mine Safety Disclosure | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
* Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
† Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BABCOCK & WILCOX ENTERPRISES, INC. | |||
/s/ E. James Ferland | |||
February 28, 2017 | By: | E. James Ferland | |
Chairman and Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
Signature | Title | |
/s/ E. James Ferland | Chairman and Chief Executive Officer (Principal Executive Officer) | |
E. James Ferland | ||
/s/ Jenny L. Apker | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Representative) | |
Jenny L. Apker | ||
/s/ Daniel W. Hoehn | Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer and Duly Authorized Representative) | |
Daniel W. Hoehn | ||
/s/ Thomas A. Christopher | Director | |
Thomas A. Christopher | ||
/s/ Cynthia S. Dubin | Director | |
Cynthia S. Dubin | ||
/s/ Brian K. Ferraioli | Director | |
Brian K. Ferraioli | ||
/s/ Stephen G. Hanks | Director | |
Stephen G. Hanks | ||
/s/ Anne R. Pramaggiore | Director | |
Anne R. Pramaggiore | ||
/s/ Larry L. Weyers | Director | |
Larry L. Weyers | ||
February 28, 2017
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