10-Q 1 a06302019form10-q.htm 10-Q Document



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019

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 Organization)
 
(I.R.S. Employer Identification No.)
 
20 SOUTH VAN BUREN AVENUE
 
 
BARBERTON, OHIO
 
44203
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (330) 753-4511
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨ 
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
BW
New York Stock Exchange
The number of shares of the registrant's common stock outstanding at July 31, 2019 was 46,275,057.

1




BABCOCK & WILCOX ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three months ended June 30,
Six months ended June 30,
(in thousands, except per share amounts)
2019
2018
2019
2018
Revenues
$
248,115

$
291,337

$
480,051

$
544,513

Costs and expenses:
 
 
 
 
Cost of operations
203,831

332,403

404,898

609,748

Selling, general and administrative expenses
42,076

47,106

84,475

106,515

Goodwill impairment
—

37,540

—

37,540

Advisory fees and settlement costs
4,778

5,142

18,388

8,231

Restructuring activities and spin-off transaction costs
936

3,826

7,015

10,688

Research and development costs
710

1,287

1,453

2,429

Loss on asset disposals, net
42

1,384

42

1,384

Total costs and expenses
252,373

428,688

516,271

776,535

Equity in loss of investees
—

—

—

(11,757
)
Operating loss
(4,258
)
(137,351
)
(36,220
)
(243,779
)
Other income (expense):




Interest expense
(26,837
)
(11,877
)
(37,971
)
(25,329
)
Interest income
201

107

760

260

Loss on debt extinguishment
(3,969
)
(49,241
)
(3,969
)
(49,241
)
Loss on sale of business
(3,601
)
—

(3,601
)
—

Benefit plans, net
2,471

7,086

5,501

14,083

Foreign exchange
9,506

(20,198
)
(647
)
(17,741
)
Other – net
43

(131
)
463

266

Total other expense
(22,186
)
(74,254
)
(39,464
)
(77,702
)
Loss before income tax expense
(26,444
)
(211,605
)
(75,684
)
(321,481
)
Income tax expense (benefit)
1,891

(1,934
)
2,517

5,029

Loss from continuing operations
(28,335
)
(209,671
)
(78,201
)
(326,510
)
Income (loss) from discontinued operations, net of tax
694

(55,932
)
694

(59,428
)
Net loss
(27,641
)
(265,603
)
(77,507
)
(385,938
)
Net income (loss) attributable to noncontrolling interest
1

(165
)
102

(263
)
Net loss attributable to stockholders
$
(27,640
)
$
(265,768
)
$
(77,405
)
$
(386,201
)
 
 
 
 
 
Basic and diluted loss per share - continuing operations
$
(1.54
)
$
(15.41
)
$
(4.26
)
$
(35.39
)
Basic and diluted earnings (loss) per share - discontinued operations
0.04

(4.11
)
0.04

(6.43
)
Basic and diluted loss per share
$
(1.50
)
$
(19.52
)
$
(4.22
)
$
(41.82
)

 
 




Shares used in the computation of earnings per share:








Basic and diluted(1)
18,366

13,616

18,362

9,235

(1) Basic and diluted shares reflect the bonus element for the 2019 Rights Offering on July 23, 2019 as described in Note 2 and the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.

See accompanying notes to Condensed Consolidated Financial Statements.

3




BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Net loss
$
(27,641
)
$
(265,603
)
$
(77,507
)
$
(385,938
)
Other comprehensive (loss) income:




Currency translation adjustments (CTA)
(7,979
)
8,517

2,281

11,740






Reclassification of CTA to net loss
3,176

—

3,176

(2,044
)





Derivative financial instruments:




Unrealized (losses) gains on derivative financial instruments
(189
)
(602
)
(1,367
)
999

Income tax (benefit) expense
—

(89
)
—

288

Unrealized (losses) gains on derivative financial instruments, net of taxes
(189
)
(513
)
(1,367
)
711

Derivative financial instrument (losses) gains reclassified into net loss
(22
)
489

202

(1,139
)
Income tax expense (benefit)
—

108

—

(248
)
Reclassification adjustment for (losses) gains included in net loss, net of taxes
(22
)
381

202

(891
)





Benefit obligations:




Unrealized gains on benefit obligations, net of taxes
—

112

—

57










Amortization of benefit plan benefits
(514
)
(1,366
)
(870
)
(1,750
)
Income tax expense
—

1,892



1,892

Amortization of benefit plan benefits, net of taxes
(514
)
(3,258
)
(870
)
(3,642
)





Other
—

—

—

(38
)





Other comprehensive (loss) income
(5,528
)
5,239

3,422

5,893

Total comprehensive loss
(33,169
)
(260,364
)
(74,085
)
(380,045
)
Comprehensive income (loss) attributable to noncontrolling interest
307

(125
)
429

(198
)
Comprehensive loss attributable to stockholders
$
(32,862
)
$
(260,489
)
$
(73,656
)
$
(380,243
)
See accompanying notes to Condensed Consolidated Financial Statements.

4




BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
June 30, 2019
December 31, 2018
Cash and cash equivalents
$
35,190

$
43,214

Restricted cash and cash equivalents
9,180

17,065

Accounts receivable – trade, net
200,586

197,203

Accounts receivable – other
62,822

44,662

Contracts in progress
150,422

144,727

Inventories
63,828

61,323

Other current assets
64,566

41,425

Total current assets
586,594

549,619

Net property, plant and equipment
78,005

90,892

Goodwill
47,113

47,108

Intangible assets
28,395

30,793

Right-of-use assets
13,121

—

Other assets
18,811

27,085

Total assets
$
772,039

$
745,497






Revolving credit facilities
$
184,400

$
145,506

Last out term loans
183,056

30,649

Accounts payable
167,081

199,882

Accrued employee benefits
27,393

19,319

Advance billings on contracts
102,284

149,367

Accrued warranty expense
39,589

45,117

Lease liabilities
4,229

—

Other accrued liabilities
97,097

122,149

Total current liabilities
805,129

711,989

Pension and other accumulated postretirement benefit liabilities
275,136

281,647

Noncurrent lease liabilities
8,816

—

Other noncurrent liabilities
25,993

29,158

Total liabilities
1,115,074

1,022,794

Commitments and contingencies


Stockholders' deficit:


Common stock, par value $0.01 per share, authorized 500,000 shares at June 30, 2019 and 200,000 shares at December 31, 2018, respectively; issued and outstanding 16,888 and 16,879 shares at June 30, 2019 and December 31, 2018, respectively (1)
1,748

1,748

Capital in excess of par value
1,055,759

1,047,062

Treasury stock at cost, 593 and 587 shares at June 30, 2019 and December 31, 2018, respectively (1)
(105,613
)
(105,590
)
Accumulated deficit
(1,295,319
)
(1,217,914
)
Accumulated other comprehensive loss
(8,010
)
(11,432
)
Stockholders' deficit attributable to shareholders
(351,435
)
(286,126
)
Noncontrolling interest
8,400

8,829

Total stockholders' deficit
(343,035
)
(277,297
)
Total liabilities and stockholders' deficit
$
772,039

$
745,497

(1) Issued and outstanding common shares and treasury stock shares reflect the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.

See accompanying notes to Condensed Consolidated Financial Statements.

5




BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Stockholders’
Deficit
 
 
Shares (1)
Par Value
 
 
(in thousands, except share and per share amounts)
Balance at December 31, 2018
16,879

$
1,748

$
1,047,062

$
(105,590
)
$
(1,217,914
)
$
(11,432
)
$
8,829

$
(277,297
)
 
 
 
 
 
 
 
 
 
Net loss
—

—

—

—

(49,765
)
—

(101
)
(49,866
)
Currency translation adjustments
—

—

—

—

—

10,260

(21
)
10,239

Derivative financial instruments
—

—

—

—

—

(954
)
—

(954
)
Defined benefit obligations
—

—

—

—

—

(356
)
—

(356
)
Stock-based compensation charges
7

—

404

(22
)
—

—

—

382

Balance at March 31, 2019
16,886

$
1,748

$
1,047,466

$
(105,612
)
$
(1,267,679
)
$
(2,482
)
$
8,707

$
(317,852
)
Net loss
—

—

—

—

(27,640
)
—

(1
)
(27,641
)
Currency translation adjustments
—

—

—

—

—

(4,803
)
(306
)
(5,109
)
Derivative financial instruments
—

—

—

—

—

(211
)
—

(211
)
Defined benefit obligations
—

—

—

—

—

(514
)
—

(514
)
Stock-based compensation charges
2

—

205

(1
)
—

—

—

204

Issuance of beneficial conversion option of Last Out Term Loan Tranche A-3
—

—

2,022

—

—

—

—

2,022

Warrants
—

—

6,066

—

—

—

—

6,066

Balance at June 30, 2019
16,888

$
1,748

$
1,055,759

$
(105,613
)
$
(1,295,319
)
$
(8,010
)
$
8,400

$
(343,035
)
(1) Common stock shares reflect the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.




6




 
Common Stock
Capital In
Excess of
Par Value
Treasury Stock
Accumulated Deficit
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Stockholders’
Equity (Deficit)
 
 
Shares (1)
Par Value
 
 
(in thousands, except share and per share amounts)
Balance at December 31, 2017
4,407

$
499

$
800,968

$
(104,785
)
$
(492,150
)
$
(22,429
)
$
8,600

$
190,703

 
 
 
 
 
 
 
 
 
Net income
—

—

—

—

(120,433
)
—

98

(120,335
)
Revenue recognition
—

—

—

—

(472
)
—

—

(472
)
Currency translation adjustments
—

—

—

—

—

1,179

(25
)
1,154

Derivative financial instruments
—

—

—

—

—

(48
)
—

(48
)
Defined benefit obligations
—

—

—

—

—

(439
)
—

(439
)
Available-for-sale investments
—

—

—

—

38

(38
)
—

—

Stock-based compensation charges
—

4

149

(720
)
—

—

—

(567
)
Balance at March 31, 2018
4,407

$
503

$
801,117

$
(105,505
)
$
(613,017
)
$
(21,775
)
$
8,673

$
69,996

Net income
—

—

—

—

(265,768
)
—

165

(265,603
)
Currency translation adjustments
—

—

—

—

—

8,517

(40
)
8,477

Derivative financial instruments
—

—

—

—

—

(132
)
—

(132
)
Defined benefit obligations
—

—

—

—

—

(3,146
)
—

(3,146
)
Available-for-sale investments
—

—

—

—

(38
)
—

—

(38
)
Rights offering, net
12,426

1,243

243,907

—

—

—

—

245,150

Stock-based compensation charges
34

—

877

(26
)
—

—

—

851

Balance at June 30, 2018
16,867

$
1,746

$
1,045,901

$
(105,531
)
$
(878,823
)
$
(16,536
)
$
8,798

$
55,555

(1) Common stock shares reflect the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.

See accompanying notes to Condensed Consolidated Financial Statements.

7




BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six months ended June 30,
(in thousands)
2019
2018
Cash flows from operating activities:

Net loss
$
(77,507
)
$
(385,938
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:


Depreciation and amortization of long-lived assets
13,842

16,938

Amortization of deferred financing costs, debt discount and payment-in-kind interest
23,115

7,236

Amortization of right of use assets
2,861

—

Loss on sale of business
3,601

—

Loss on debt extinguishment
3,969

49,241

Goodwill impairment of discontinued operations
—

72,309

Goodwill impairment
—

37,540

Income from equity method investees
—

(6,605
)
Other-than-temporary impairment of equity method investment in TBWES
—

18,362

Losses on asset disposals and impairments
42

1,934

Reserve for claims receivable
—

15,523

Benefit from deferred income taxes, including valuation allowances
(776
)
(1,477
)
Mark to market losses (gains) and prior service cost amortization for pension and postretirement plans
390

(1,149
)
Stock-based compensation, net of associated income taxes
609

1,030

Changes in assets and liabilities:


Accounts receivable
(5,765
)
40,641

Contracts in progress and advance billings on contracts
(53,571
)
(30,494
)
Inventories
(3,951
)
5,925

Income taxes
1,295

(4,036
)
Accounts payable
(31,688
)
(15,103
)
Accrued and other current liabilities
(15,670
)
20,331

Accrued contract loss
(45,779
)
9,720

Pension liabilities, accrued postretirement benefits and employee benefits
(110
)
(17,579
)
Other, net
(7,918
)
15,008

Net cash used operating activities
(193,011
)
(150,643
)
Cash flows from investing activities:


Purchase of property, plant and equipment
(434
)
(4,350
)
Proceeds from sale of business
7,445

5,105

Proceeds from sale of equity method investments in joint venture
—

21,078

Purchases of available-for-sale securities
(4,187
)
(11,383
)
Sales and maturities of available-for-sale securities
2,880

13,578

Other, net
(462
)
189

Net cash from investing activities
5,242

24,217


8





 
Six months ended June 30,
(in thousands)
2019
2018
Cash flows from financing activities:


Borrowings under our U.S. revolving credit facility
179,700

307,300

Repayments of our U.S. revolving credit facility
(140,200
)
(205,300
)
Repayments of our second lien term loan facility
—

(212,590
)
Borrowings under Last Out Term Loan Tranche A-2 from related party
10,000

—

Borrowings under Last Out Term Loan Tranche A-3 from related party
141,350

—

Repayments under our foreign revolving credit facilities
(605
)
(5,022
)
Shares of our common stock returned to treasury stock
(23
)
(746
)
Proceeds from rights offering
—

248,375

Costs related to rights offering
(682
)
(3,225
)
Debt issuance costs
(14,400
)
(6,736
)
Net cash from financing activities
175,140

122,056

Effects of exchange rate changes on cash
(3,280
)
(7,026
)
Net decrease in cash, cash equivalents and restricted cash
(15,909
)
(11,396
)
Less net increase in cash and cash equivalents of discontinued operations
—

(2,513
)
Net decrease in cash, cash equivalents and restricted cash of continuing operations
(15,909
)
(8,883
)
Cash, cash equivalents and restricted cash of continuing operations, beginning of period
60,279

69,697

Cash, cash equivalents and restricted cash of continuing operations, end of period
$
44,370

$
60,814


See accompanying notes to Condensed Consolidated Financial Statements.

9




BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019

NOTE 1 – BASIS OF PRESENTATION

These interim financial statements of Babcock & Wilcox Enterprises, Inc. ("B&W Enterprises," "we," "us," "our" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission ("SEC") instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, as amended ("Annual Report"). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our Condensed Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.

Going Concern Considerations

The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

We face liquidity challenges from losses recognized on our six European Vølund EPC loss contracts described in Note 4, which have required amendments and waivers to maintain compliance with the Amended Credit Agreement, inclusive of Amendments No. 16 and No. 17. Our liquidity is provided under a credit agreement dated May 11, 2015, as amended, with a syndicate of lenders ("Amended Credit Agreement") that governs a revolving credit facility ("U.S. Revolving Credit Facility") and our last out term loan facility ("Last Out Term Loans"). The Amended Credit Agreement and the amendments and waivers are described in more detail in Note 13, Note 14 and Note 18.

To address our liquidity needs and the going concern uncertainty, we have taken the following actions in 2019 as follows:
•
completed equitization transactions on July 23, 2019 as described in Note 18 and Note 17, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise $50.0 million that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans;
•
executed a one-for-ten reverse stock split of our issued and outstanding common stock, which became effective on July 24, 2019;
•
completed the sale of a non-core materials handling business in Germany, Loibl GmbH ("Loibl") effective May 31, 2019 for €10.0 million (approximately $11.4 million), subject to adjustment, resulting in net receipt of $7.4 million;
•
received $150.0 million in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in Note 14, from B. Riley FBR, Inc., a related party, on April 5, 2019;
•
received $10.0 million in net proceeds from Tranche A-2 of the Last Out Term Loans, described in Note 14, from B. Riley Financial, Inc. (together with its affiliates, including B. Riley FBR, Inc., "B. Riley"), a related party, on March 20, 2019;
•
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in Note 4, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans;
•
entered into an additional settlement as described in Note 4 in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started, whereby our obligations and our risk from acting as the prime EPC should the project move forward was eliminated;
•
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in Note 13 and Note 14, the most recent of which were Amendments No. 16 and No. 17, dated April 5, 2019 and August 7, 2019, respectively, which provided Tranche A-3 of the Last Out Term Loans described above and in Note 14, reset the financial and other covenants, adjusted the interest rate of the

10




Last Out Term Loans, reset the maturity date of the Last Out Term Loans to December 31, 2020, increased borrowing capacity under the U.S. Revolving Credit Facility by reducing the minimum liquidity requirement, allowed for the issuance of a limited amount of new letters of credit with respect to any future Vølund project, permitted other letters of credit to expire up to one year after the maturity of the U.S. Revolving Credit Facility, clarifies (Amendment No. 17) the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019; and
•
filed and plan to file for waiver of required minimum contributions to the U.S. Pension Plan as described in Note 12, that if granted, would reduce cash funding requirements in 2019 by approximately $15 million and a similar or greater amount in 2020 and would increase contributions over the following five years. The waiver request for the first plan year remains under review by the IRS and the waiver request for the second plan year is expected to be filed later in 2019 or early 2020.

Management believes it has taken and is continuing to take prudent actions to address the substantial doubt regarding our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face because some matters may not fully be in our control. Amendment No. 16 to the Amended Credit Facility also created a new event of default for failure to terminate the existing U.S. Revolving Credit Facility on or prior to March 15, 2020, which is within twelve months of the date of this filing. Our ability to comply with the financial and other covenants of the Amended Credit Facility through that date are dependent upon achieving our forecasted financial results. While management believes it will be able to obtain additional financing to replace our U.S. Revolving Credit facility, the ability to do so will depend on credit markets and other matters that are outside of our control.

In addition to the discussions regarding additional financing described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available.

NYSE Continued Listing Status

On November 27, 2018, we received written notification (the "NYSE Notice"), from the New York Stock Exchange (the "NYSE"), that we were not in compliance with an NYSE continued listing standard in Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock fell below $1.00 over a period of 30 consecutive trading days. We can regain compliance with the minimum per share average closing price standard at any time during the six-month cure period if, on the last trading day of any calendar month during the cure period, we have (i) a closing share price of at least $1.00 and (ii) an average closing price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. We completed a reverse stock split effective as of July 24, 2019 to regain compliance, but there is no guarantee that this reverse stock split will enable us to cure this deficiency. Our common stock could also be delisted if we fail to satisfy any other continued listing standards. For example, based on our current shareholders' equity, our common stock may be subject to delisting if our average market capitalization over a consecutive 30-trading-day period is less than $50.0 million, subject to our ability to regain compliance with this listing standard during an applicable cure period.

Reverse Stock Split
 
On July 11, 2019, the Company's board of directors approved a reverse stock split of one-for-ten on the Company's issued and outstanding common stock which became effective on July 24, 2019. The one-for-ten reverse stock split automatically converted every ten shares of the Company's outstanding and treasury common stock prior to the effectiveness of the reverse stock split into one share of common stock. No fractional shares were issued in the reverse stock split. Instead, stockholders who would otherwise have held fractional shares received cash payments (without interest) in respect of such fractional shares. The reverse stock split did not impact any stockholder's percentage ownership of the Company, subject to the treatment of fractional shares. The reverse stock split was undertaken to increase the market price per share of the Company's common stock to allow the Company to regain compliance with the NYSE's continued listing standards relating to minimum price per share pending final approval by the NYSE.


11




NOTE 2 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share of our common stock, net of noncontrolling interest:
 
Three months ended June 30,
Six months ended June 30,
(in thousands, except per share amounts)
2019
2018
2019
2018
Loss from continuing operations
$
(28,334
)
$
(209,836
)
$
(78,099
)
$
(326,773
)
Loss from discontinued operations, net of tax
694

(55,932
)
694

(59,428
)
Net loss attributable to shareholders
$
(27,640
)
$
(265,768
)
$
(77,405
)
$
(386,201
)
 
 
 
 
 
Weighted average shares used to calculate basic and diluted earnings per share(1)
18,366

13,616

18,362

9,235

 
 
 
 
 
Basic and diluted loss per share - continuing operations
$
(1.54
)
$
(15.41
)
$
(4.26
)
$
(35.39
)
Basic and diluted earnings (loss) per share - discontinued operations
0.04

(4.11
)
0.04

(6.43
)
Basic and diluted loss per share
$
(1.50
)
$
(19.52
)
$
(4.22
)
$
(41.82
)
(1) Weighted average shares used to calculate basic and diluted earnings per share reflect the bonus element for the 2019 Rights Offering on July 23, 2019 as described below and the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.

In July 2019, the Company completed the 2019 Rights Offering, as described in Note 17, to existing common stockholders. Because the rights issuance was offered to all existing stockholders at an exercise price that was less than the fair value of the stock, the weighted average shares outstanding and basic and diluted earnings (loss) per share were adjusted retroactively to reflect the bonus element of the rights offering for all periods presented by a factor of 1.0875. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in the three months ended June 30, 2019 and 2018 were 16,888 thousand and 12,521 thousand, respectively. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in the six months ended June 30, 2019 and 2018 were 16,884 thousand and 8,492 thousand, respectively.

Because we incurred a net loss in the three and six months ended June 30, 2019 and 2018, basic and diluted shares are the same.

If we had net income in the three months ended June 30, 2019 and 2018, diluted shares would include an additional 25.7 thousand and 84.7 thousand shares, respectively. If we had net income in the six months ended June 30, 2019 and 2018, diluted shares would include an additional 35.8 thousand and 93.5 thousand shares, respectively.

We excluded 123.4 thousand and 321.1 thousand shares related to stock options from the diluted share calculation for the three months ended June 30, 2019 and 2018, respectively, because their effect would have been anti-dilutive. We excluded 226.6 thousand and 248.7 thousand shares related to stock options from the diluted share calculation for the six months ended June 30, 2019 and 2018, respectively, because their effect would have been anti-dilutive.

NOTE 3 – SEGMENT REPORTING

Our operations are assessed based on three reportable segments which are summarized as follows:

•
Babcock & Wilcox segment: focused on the supply of, and aftermarket services for, steam-generating, environmental and auxiliary equipment for power generation and other industrial applications. This segment was formerly named the Power segment.
•
Vølund & Other Renewable segment: focused on the supply of steam-generating systems, environmental and auxiliary equipment and operations and maintenance services for the waste-to-energy and biomass power generation industries. This segment was formerly named the Renewable segment.
•
SPIG segment: focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services. This segment was formerly part of the Industrial segment.


12




The gross product line revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Babcock & Wilcox segment elimination is revenue associated with construction services. The primary component of total eliminations is associated with Babcock & Wilcox segment construction services provided to the SPIG segment. An analysis of our operations by segment is as follows:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Revenues:
 
 
 
 
Babcock & Wilcox segment
 
 
 
 
Retrofits
$
44,923

$
69,344

$
75,597

$
131,327

New build utility and environmental
55,377

42,194

124,284

55,041

Aftermarket parts and field engineering services
64,308

63,299

127,395

136,372

Industrial steam generation
49,357

28,464

96,367

43,370

Eliminations
(13,001
)
(5,549
)
(34,121
)
(9,232
)
 
200,964

197,752

389,522

356,878

Vølund & Other Renewable segment
 
 
 
 
Renewable new build and services
31,553

40,077

61,086

84,788

Operations and maintenance services
2,313

14,925

2,873

30,172

Eliminations
(171
)
—

(732
)
—

 
33,695

55,002

63,227

114,960

SPIG segment
 
 
 
 
New build cooling systems
17,385

33,699

38,391

62,744

Aftermarket cooling system services
7,303

12,316

15,474

20,015

Eliminations
(1,854
)
—

(2,129
)
—

 
22,834

46,015

51,736

82,759

 
 
 
 
 
Eliminations
(9,378
)
(7,432
)
(24,434
)
(10,084
)
 
$
248,115

$
291,337

$
480,051

$
544,513


Our primary measures of segment profitability are gross profit and adjusted earnings before interest, tax, depreciation and amortization ("EBITDA"). The presentation of the components of our gross profit and adjusted EBITDA in the tables below are consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, mark to market ("MTM") pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment. Beginning in the first quarter of 2019, pension benefit (expense), which affected only the Babcock & Wilcox segment, is also not allocated to adjusted EBITDA of the segments. Prior periods have been conformed to be comparable. Adjusted EBITDA for each segment is presented below with a reconciliation to net income. Adjusted EBITDA is not a recognized term under GAAP and should not be considered in isolation or as an alternative to net earnings (loss), operating profit (loss) or cash flows from operating activities as a measure of our liquidity. Adjusted EBITDA as presented below differs from the calculation used to compute our leverage ratio and interest coverage ratio as defined by our U.S. Revolving Credit Facility. Because all companies do not use identical calculations, the amounts presented for adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

13




 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Gross profit (loss)(1):
 
 
 
 
Babcock & Wilcox segment
$
37,853

$
30,013

$
68,959

$
60,876

Vølund & Other Renewable segment
5,057

(69,329
)
2,201

(119,778
)
SPIG segment
2,388

79

6,064

(2,672
)
Intangible amortization expense included in cost of operations
(1,014
)
(1,829
)
(2,071
)
(3,661
)

44,284

(41,066
)
75,153

(65,235
)
 
 
 
 
 
Selling, general and administrative ("SG&A") expenses
(41,948
)
(46,948
)
(84,217
)
(106,120
)
Advisory fees and settlement costs
(4,778
)
(5,142
)
(18,388
)
(8,231
)
Intangible amortization expense included in SG&A
(128
)
(158
)
(258
)
(395
)
Goodwill impairment
—

(37,540
)
—

(37,540
)
Restructuring activities and spin-off transaction costs
(936
)
(3,826
)
(7,015
)
(10,688
)
Research and development costs
(710
)
(1,287
)
(1,453
)
(2,429
)
Loss on asset disposals, net
(42
)
(1,384
)
(42
)
(1,384
)
Equity in income and impairment of investees
—

—

—

(11,757
)
Operating loss
$
(4,258
)
$
(137,351
)
$
(36,220
)
$
(243,779
)
(1) Intangible amortization is not allocated to the segments' gross profit, but depreciation is allocated to the segments' gross profit.


14





Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Adjusted EBITDA
 
 




Babcock & Wilcox segment(1) 
$
19,032

$
9,897

$
27,996

$
14,074

Vølund & Other Renewable segment
(779
)
(78,603
)
(9,642
)
(140,357
)
SPIG segment
(142
)
(6,222
)
517

(13,532
)
Corporate(2)
(9,367
)
(6,194
)
(14,351
)
(17,808
)
Research and development costs
(710
)
(1,287
)
(1,453
)
(2,429
)

8,034

(82,409
)
3,067

(160,052
)









Restructuring activities and spin-off transaction costs
(936
)
(3,826
)
(7,015
)
(10,688
)
Financial advisory services
(3,197
)
(5,142
)
(7,155
)
(8,231
)
Settlement cost to exit Vølund contract(3)
—

—

(6,575
)
—

Advisory fees for settlement costs and liquidity planning
(1,581
)
—

(4,658
)
—

Goodwill impairment
—

(37,540
)
—

(37,540
)
Impairment of equity method investment in TBWES
—

—

—

(18,362
)
Gain on sale of equity method investment in BWBC
—

—

—

6,509

Depreciation & amortization
(6,536
)
(6,921
)
(13,842
)
(13,902
)
Loss on asset disposal
(42
)
(1,513
)
(42
)
(1,513
)
Operating loss
(4,258
)
(137,351
)
(36,220
)
(243,779
)
Interest expense, net
(26,636
)
(11,770
)
(37,211
)
(25,069
)
Loss on debt extinguishment
(3,969
)
(49,241
)
(3,969
)
(49,241
)
Loss on sale of business
(3,601
)
—

(3,601
)
—

Net pension benefit before MTM
3,333

6,542

6,761

13,539

MTM (gain) loss from benefit plans
(862
)
544

(1,260
)
544

Foreign exchange
9,506

(20,198
)
(647
)
(17,741
)
Other – net
43

(131
)
463

266

Loss before income tax expense
(26,444
)
(211,605
)
(75,684
)
(321,481
)
Income tax expense (benefit)
1,891

(1,934
)
2,517

5,029

Loss from continuing operations
(28,335
)
(209,671
)
(78,201
)
(326,510
)
Gain (loss) from discontinued operations, net of tax
694

(55,932
)
694

(59,428
)
Net loss
(27,641
)
(265,603
)
(77,507
)
(385,938
)
Net income (loss) attributable to noncontrolling interest
1

(165
)
102

(263
)
Net loss attributable to stockholders
$
(27,640
)
$
(265,768
)
$
(77,405
)
$
(386,201
)
(1) 
The Babcock & Wilcox segment adjusted EBITDA for the three and six months ended June 30, 2018 excludes $6.5 million and $13.5 million, respectively, of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, that were previously included in the segment results. Beginning in 2019, net pension benefits are no longer allocated to the segments, and prior periods have been adjusted to be presented on a comparable basis.
(2) 
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the SPIG segment have been included with other unallocated costs in Corporate, and total $2.9 million and $5.7 million in the three months and six months ended June 30, 2018, respectively.
(3) 
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement eliminates our obligations and our risk related to acting as the prime EPC should the project move forward.

We do not separately identify or report our assets by segment as our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is measured.


15




NOTE 4 – REVENUE RECOGNITION AND CONTRACTS

Adoption of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606")

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a $0.5 million net increase to opening retained earnings as of January 1, 2018 from the cumulative effect of adopting Topic 606 that primarily related to transitioning the timing of certain sales commissions expense. The effect on revenue from adopting Topic 606 was not material for the six months ended June 30, 2018.

Revenue Recognition

A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.

Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services primarily in the Babcock & Wilcox and SPIG segments, accounted for 18% and 23% of our revenue for the three months ended June 30, 2019 and 2018, respectively, and 18% and 23% of our revenue for the six months ended June 30, 2019 and 2018, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon shipment or delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.

Revenue from products and services transferred to customers over time accounted for 82% and 77% of our revenue for the three months ended June 30, 2019 and 2018, respectively, and 82% and 77% of our revenue for the six months ended June 30, 2019 and 2018, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all three of our segments. Typically, revenue is recognized over time using the percentage-of-completion method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the percentage-of-completion method contain a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. 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 and have done so, particularly in our Vølund and Other Renewable segment. Refer to Note 3 for our disaggregation of revenue by product line.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In many instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.

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 we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.

We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.

16




Contract Balances

The following represents the components of our contracts in progress and advance billings on contracts included in our Condensed Consolidated Balance Sheets:
(in thousands)
June 30, 2019
December 31, 2018
$ Change
% Change
Contract assets - included in contracts in progress:
 
 
 
 
Costs incurred less costs of revenue recognized
$
33,155

$
49,910

$
(16,755
)
(34
)%
Revenues recognized less billings to customers
117,267

94,817

22,450

24
 %
Contracts in progress
$
150,422

$
144,727

$
5,695

4
 %
Contract liabilities - included in advance billings on contracts:
 
 
 
 
Billings to customers less revenues recognized
$
99,317

$
140,933

$
(41,616
)
(30
)%
Costs of revenue recognized less cost incurred
2,967

8,434

(5,467
)
(65
)%
Advance billings on contracts
$
102,284

$
149,367

$
(47,083
)
(32
)%
 
 
 
 
 
Net contract balance
$
48,138

$
(4,640
)
$
52,778

(1,137
)%
 
 
 
 
 
Accrued contract losses
$
11,014

$
61,651

$
(50,637
)
(82
)%

The impact of adopting Topic 606 on components of our contracts in progress and advance billings on contracts was not material at January 1, 2018.

Backlog

On June 30, 2019 we had $585.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 37.6%, 20.2% and 42.2% of our remaining performance obligations as revenue in the remainder of 2019, 2020 and thereafter, respectively.

Changes in Contract Estimates

In the three and six months ended June 30, 2019 and 2018, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Increases in gross profits for changes in estimates for over time contracts
$
8,088

$
6,019

$
15,894

$
13,946

Decreases in gross profits for changes in estimates for over time contracts
(16,051
)
(50,327
)
(23,728
)
(110,498
)
Net changes in gross profits for changes in estimates for over time contracts
$
(7,963
)
$
(44,308
)
$
(7,834
)
$
(96,552
)

Vølund EPC Loss Contracts

We had six Vølund contracts for renewable energy facilities in Europe that were loss contracts at December 31, 2017. The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services.

In the three months ended June 30, 2019 and 2018, we recorded $3.2 million and $57.3 million in net losses, respectively, inclusive of warranty expense as described in Note 10, resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In the three months ended June 30, 2019, we reduced our estimate of liquidated damages on these contracts by $0.4 million. These changes in estimates in the three months ended June 30, 2018 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these six contracts by $3.1 million.


17




In the six months ended June 30, 2019 and 2018, we recorded $7.4 million and $110.0 million in net losses, respectively, inclusive of warranty expense as described in Note 10, resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In the six months ended June 30, 2019, we reduced our estimate of liquidated damages on these contracts by $0.4 million. These changes in estimates in the six months ended June 30, 2018 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these six contracts by $16.3 million. Total anticipated liquidated damages associated with these six contracts were $88.2 million and $93.4 million at June 30, 2019 and June 30, 2018, respectively.

As of June 30, 2019, five of the six European Vølund EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the March 29, 2019 settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined £70 million ($91.5 million) on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately $144 million), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. Upon completion of these activities in accordance with the settlement, we will have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed. We estimated the portion of this settlement related to waiver of the rejection right on the fifth project was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. We are still pursuing insurance recoveries and claims against subcontractors. For the second loss project, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant.

As of June 30, 2019, the status of these six Vølund EPC loss contracts was as follows:

The first contract, a waste-to-energy plant in Denmark, became a loss contract in the second quarter of 2016. As of June 30, 2019, this contract was approximately 97% complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. A settlement was reached with the customer to achieve takeover on January 31, 2019, after which only punch list items and other agreed to remediation items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. As of January 31, 2019, the contract is in the warranty phase. During the three and six months ended June 30, 2019, we recognized additional contract losses of $2.0 million on this contract as a result of identifying additional remediation costs in the second quarter of 2019. Our estimate at completion as of June 30, 2019 includes $9.1 million of total expected liquidated damages. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $3.2 million. In the three and six months ended June 30, 2018, we recognized additional contract losses of $8.3 million and $15.3 million, respectively, as a result of differences in actual and estimated costs, schedule delays, issues encountered during trial operations and increases in expected warranty costs. As of June 30, 2018, this contract had $3.1 million of accrued losses and was 97% complete.

The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of June 30, 2019, this contract was approximately 100% complete. Trial operations began in April 2019 and takeover by the customer occurred effective May 2019. This project is subject to the March 29, 2019 settlement agreement described above. During the three and six months ended June 30, 2019, we recognized additional contract losses of $1.2 million and $1.9 million, respectively, on this contract as a result of repairs required during startup commissioning activities, additional punch list and other commissioning costs, and changes in construction cost estimates. Our estimate at completion as of June 30, 2019 includes $19.1 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of June 30, 2019 and 2018 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.1 million. In the three and six months ended June 30, 2018, we recognized contract losses of $9.3 million and $13.4 million, respectively, on this contract as a result of repairs required during startup commissioning activities in the second quarter of 2018, increases in expected warranty costs, changes in construction cost estimates, subcontractor productivity being lower than previous estimates, and additional expected punch list and other commissioning costs. As of June 30, 2018, this contract had $10.6 million of accrued losses and was 86% complete.

18





The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of June 30, 2019, this contract was approximately 100% complete. Warranty began in March 2018, when we agreed to a partial takeover with the customer, and we agreed to a full takeover by the customer at the end of October 2018, when we also agreed to a scheduled timeline for remaining punch list activities to be completed around the customer's future planned outages. During the three and six ended June 30, 2019, we did not recognize additional charges on the contract. Our estimate at completion as of June 30, 2019 includes $6.7 million of total expected liquidated damages due to schedule delays. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.1 million. In the three and six months ended June 30, 2018, we recognized charges of $1.6 million and $3.5 million, respectively, from changes in our estimate at completion, and as of June 30, 2018, this contract had $0.5 million of accrued losses and was 99% complete.

The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of June 30, 2019, this contract was approximately 99% complete. Trial operations began in November 2018 and takeover by the customer occurred in February 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. During the three and six months ended June 30, 2019, we recognized additional contract charges of $4.0 million and $4.3 million, respectively, on this contract due to changes in estimated bonus revenue and cost to complete remaining punch list, remediation of certain performance guarantees and other close out items. Our estimate at completion as of June 30, 2019 includes $20.7 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of June 30, 2019 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.4 million. In the three and six months ended June 30, 2018, we recognized contract losses of $12.8 million and $24.8 million, respectively, on this contract as a result of changes in the expected selling price, changes in construction cost estimates and schedule delays, and as of June 30, 2018, this contract had $6.3 million of accrued losses and was 88% complete.

The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of June 30, 2019, this contract was approximately 97% complete. This project is subject to the March 29, 2019 settlement agreement described above. We estimated the portion of this settlement related to waiver of the rejection right on the fifth project was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. Under the settlement, our remaining performance obligations were limited to construction support services to complete certain key systems of the plant by May 31, 2019. The settlement also eliminates all historical claims and remaining liquidated damages. Remaining items at June 30, 2019 are primarily related to punch list and other finalization items for the key systems under the terms of the settlement and subcontract close outs. During the three months ended June 30, 2019, our estimated loss on the contract improved by $4.0 million inclusive of warranty. During the six months ended June 30, 2019, our estimated loss on the contract improved by $1.8 million inclusive of warranty. Our estimate at completion as of June 30, 2019, includes $13.6 million of total expected liquidated damages due to schedule delays. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $5.3 million. In the three and six months ended June 30, 2018, we recognized charges of $21.4 million and $39.7 million, respectively, from changes in our estimate at completion, and as of June 30, 2018, this contract had $29.0 million of accrued losses and was 62% complete.

The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of June 30, 2019, this contract was approximately 99% complete. Trial operations began in December 2018 and customer takeover occurred on January 25, 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. The contract is in the warranty phase. During the three and six months ended June 30, 2019, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract charges of $0.1 million and $0.9 million, respectively related to matters encountered in completing punch list items. Our estimate at completion as of June 30, 2019 includes $19.0 million of total expected liquidated damages due to schedule delays. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.2 million. In the three and six months ended June 30, 2018, we recognized additional contract losses of $3.9 million and $13.3 million, respectively, as a result of changes in our estimate at completion, and as of June 30, 2018, this contract had $2.6 million of accrued losses and was 87% complete.

During the three and six months ended June 30, 2019, we recognized additional charges of $1.3 million and $1.5 million, respectively, on our other Vølund renewable energy projects that are not loss contracts. During the three and six months

19




ended June 30, 2018, we did not recognize additional losses on our other Vølund renewable energy projects that are not loss contracts.

In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure. Provisional regulatory approval to begin structural repairs to the failed beam was obtained on March 29, 2018 (later than previously estimated), and full approval to proceed with repairs was obtained in April 2018. Full access to the site was obtained on June 6, 2018 after completion of the repairs to the structure. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately $36 million, which is included in the June 30, 2019 estimated losses at completion for these three contracts. We are continuing to aggressively pursue recovery of this cost under various applicable insurance policies and from responsible subcontractors. In June 2019, we agreed in principle to a settlement agreement under one insurance policy related to recover GBP 2.8 million ($3.5 million) of certain losses on the fifth project; we also recorded this recovery in accounts receivable - other in our Condensed Consolidated Balance Sheet as of June 30, 2019.

During the third quarter of 2016, we claimed a DKK 100.0 million ($15.5 million) insurance recovery for a portion of the losses on the first Vølund contract discussed above. In May 2018, our insurer disputed coverage on our insurance claim. We continued to aggressively pursue full recovery under the policy, and we filed for arbitration in July 2018. On June 28, 2019, we agreed to a full settlement, under which our insurer paid DKK 37 million ($5.6 million) to us in July 2019. As of December 31, 2018 and March 31, 2019, we had net receivable of DKK 20.0 million ($3.2 million), which was increased to DKK 37 million ($5.6 million) as of June 30, 2019 in accounts receivable - other in our Condensed Consolidated Balance Sheets.

Other Vølund Contract Settlement

In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The £5.0 million (approximately $6.6 million) payment on April 5, 2019 for the settlement eliminates our obligations and our risk related to acting as the prime EPC should the project have moved forward.

SPIG U.S. Loss Contract

At June 30, 2019, SPIG had one significant loss contract, which is a contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S.  At June 30, 2019, the design and procurement are substantially complete, and construction is nearing completion.  Overall, the contract is 97% complete and it is expected be fully complete in mid-2019. As of June 30, 2019, the reserve for estimated contract losses recorded in other accrued liabilities in our Condensed Consolidated Balance Sheets was $0.5 million related to this contract.  Construction is being performed by the Babcock & Wilcox segment, but the contract loss is included in the SPIG segment.

NOTE 5 – INVENTORIES

The components of inventories are as follows:
(in thousands)
June 30, 2019
December 31, 2018
Raw materials and supplies
$
45,931

$
44,833

Work in progress
6,142

5,348

Finished goods
11,755

11,142

Total inventories
$
63,828

$
61,323



20




NOTE 6 – PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment less accumulated depreciation is as follows:
(in thousands)
June 30, 2019
December 31, 2018
Land
$
3,568

$
3,575

Buildings
106,182

106,238

Machinery and equipment
176,928

181,825

Property under construction
2,381

2,290

 
289,059

293,928

Less accumulated depreciation
211,054

203,036

Net property, plant and equipment
$
78,005

$
90,892


In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. At the same time, we announced that we would consolidate most of our Barberton and Copley, Ohio operations into new, leased office space in Akron, Ohio. The move to the new, leased office space is expected to occur during the fourth quarter of 2019.  We do not expect to incur significant relocation costs; however, we expect $7.9 million of accelerated depreciation to be recognized through mid-2019, of which $2.0 million and $4.0 million was recognized during the three and six months ended June 30, 2019, respectively, and $7.3 million has been recognized cumulatively, since the decision to relocate in the third quarter of 2018.

NOTE 7 - GOODWILL

The following summarizes the changes in the net carrying amount of goodwill as of June 30, 2019:
(in thousands)
Babcock & Wilcox
Balance at December 31, 2018
$
47,108

Currency translation adjustments
5

Balance at June 30, 2019
$
47,113


In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. We early adopted ASU 2017-04 on April 1, 2018, effective the first day of our 2018 second quarter.

Goodwill is tested for impairment annually and when impairment indicators exist. All of our remaining goodwill is related to the Babcock & Wilcox reporting unit in the Babcock & Wilcox segment. Because the Babcock & Wilcox reporting unit had a negative carrying value, reasonable changes in the assumptions would not indicate impairment. No impairment indicators were identified during the six months ended June 30, 2019. In the three and six months ended June 30, 2018, we recognized $37.5 million impairment of all the remaining goodwill in the SPIG reporting unit resulting from a reduction in their bookings than previously forecasted.


21




NOTE 8 – INTANGIBLE ASSETS

Our intangible assets are as follows:
(in thousands)
June 30, 2019
December 31, 2018
Definite-lived intangible assets
 
 
Customer relationships
$
24,544

$
24,764

Unpatented technology
15,098

15,098

Patented technology
2,611

2,616

Tradename
12,514

12,566

All other
9,938

9,728

Gross value of definite-lived intangible assets
64,705

64,772

Customer relationships amortization
(17,968
)
(17,219
)
Unpatented technology amortization
(4,507
)
(3,760
)
Patented technology amortization
(2,412
)
(2,348
)
Tradename amortization
(3,968
)
(3,672
)
All other amortization
(8,760
)
(8,285
)
Accumulated amortization
(37,615
)
(35,284
)
Net definite-lived intangible assets
$
27,090

$
29,488

Indefinite-lived intangible assets
 
 
Trademarks and trade names
$
1,305

$
1,305

Total intangible assets, net
$
28,395

$
30,793


The following summarizes the changes in the carrying amount of intangible assets:
 
Six months ended June 30,
(in thousands)
2019
2018
Balance at beginning of period
$
30,793

$
42,065

Amortization expense
(2,331
)
(4,056
)
Currency translation adjustments and other
(67
)
(1,641
)
Balance at end of the period
$
28,395

$
36,368


Amortization of intangible assets is included in cost of operations and SG&A in our Condensed Consolidated Statement of Operations but is not allocated to segment results.

Estimated future intangible asset amortization expense is as follows (in thousands):
 
Amortization Expense
Three months ending September 30, 2019
$
940

Three months ending December 31, 2019
940

Twelve months ending December 31, 2020
3,487

Twelve months ending December 31, 2021
3,261

Twelve months ending December 31, 2022
3,200

Twelve months ending December 31, 2023
3,197

Twelve months ending December 31, 2024
3,085

Thereafter
8,980



22




NOTE 9 – LEASES

Accounting for Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). We adopted this new standard on January 1, 2019 and used the effective date as our date of initial application while continuing to present the comparative periods in accordance with the guidance under the lease standard in effect during those prior periods in the Condensed Consolidated Financial Statements. We recorded an immaterial cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. We elected the "package of practical expedients", which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. However, we did not elect to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840.

We have implemented new lease accounting software and have established new processes and internal controls that are required to comply with the new lease accounting and disclosure requirements set forth by the new standard. See Note 27 for additional information about the impact of adopting ASC 842 in the Condensed Consolidated Financial Statements.

We determine if an arrangement is a lease at inception. Leases are included in Right-of-use ("ROU") assets, lease liabilities and noncurrent lease liabilities in the Condensed Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As substantially all of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The ROU assets also include any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease, which we recognize when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) together with the non-lease components (e.g., common-area maintenance costs) as a single lease component for all classes of underlying assets.

In September 2018, we announced that we would consolidate most of our Barberton and Copley, Ohio operations into new, leased office space in Akron, Ohio. The move to the new, leased office space is expected to occur during the fourth quarter of 2019.  As of June 30, 2019, the operating lease agreement for the office space in Akron had not yet commenced; it will commence when it is ready for occupation. The lease has an initial term of fifteen years, with an option to extend up to two additional ten-year terms. Base rent will increase two percent annually, making the total future minimum payments during the initial term of the lease approximately $55 million. This lease, which has not yet commenced, is not included in the following tables.

Operating Leases

We have operating leases for real estate, vehicles, and certain equipment. We do not have any financing leases in our portfolio. Our leases have remaining lease terms of up to 10 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year.

The components of lease expense were as follows:
(in thousands)
Three months ended June 30, 2019
Six months ended June 30, 2019
Operating lease expense
$
1,589

$
3,498

Short-term lease expense
2,335

5,196

Variable lease expense
871

983

Sublease income (1)
(14
)
(24
)
   Total lease expense
$
4,781

$
9,653

(1) Sublease income excludes rental income from owned properties, which is not material.


23




Other information related to leases is as follows:
(in thousands)
Three months ended June 30, 2019
Six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from leases
$
1,560

$
3,661

Right-of-use assets obtained in exchange for lease liabilities:


 
Operating leases
$
812

$
1,013


Amounts relating to leases were presented in the Condensed Consolidated Balance Sheets as of June 30, 2019 in the following line items:
(in thousands, except lease term and discount rate)
June 30, 2019
Right-of-use assets
$
13,121

 
 
Liabilities:
 
Lease liabilities
$
4,229

Noncurrent lease liabilities
8,816

Total lease liabilities
$
13,045

 
 
Weighted-average remaining lease term:
 
   Operating leases (in years)
3.61

Weighted-average discount rate:


   Operating leases
9.47
%

Future minimum lease payments required under non-cancellable operating leases as of June 30, 2019 were as follows:
(in thousands)
 
Six months ending December 31, 2019
$
2,702

Twelve months ending December 31, 2020
4,774

Twelve months ending December 31, 2021
3,332

Twelve months ending December 31, 2022
2,155

Twelve months ending December 31, 2023
1,417

Thereafter
899

Total
$
15,279

Less imputed interest
(2,234
)
Lease liability
$
13,045



24




NOTE 10 – ACCRUED WARRANTY EXPENSE

We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
 
Six months ended June 30,
(in thousands)
2019
2018
Balance at beginning of period
$
45,117

$
33,514

Additions
2,717

28,008

Expirations and other changes
(4,412
)
(1,592
)
Payments
(3,641
)
(5,791
)
Translation and other
(192
)
(1,001
)
Balance at end of period
$
39,589

$
53,138


We accrue estimated expense included in cost of operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. 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. Warranty expense in the three and six months ended June 30, 2019 includes $3.9 million of warranty reversal related to developments in the quarter stemming from the March 29, 2019 settlement agreement for the Vølund EPC contracts described in Note 4. Warranty expense for the six months ended June 30, 2018, includes a $15.1 million increase in expected warranty costs for the six European renewable energy loss contracts based on experience from the startup and commissioning activities in the second quarter of 2018 and $5.3 million of specific provisions on certain contracts in the Babcock & Wilcox segment for specific technical matters and customer requirements.

NOTE 11 – RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS

The following tables summarize the restructuring activity and spin-off costs incurred by segment:
(in thousands)
 
Three months ended June 30, 2019
Total severance and related costs
Babcock & Wilcox segment
$
127

Vølund & Other Renewable segment
437

SPIG segment
258

Corporate
114

 
$
936


(in thousands)
 
Six months ended June 30, 2019
Total severance and related costs
Babcock & Wilcox segment
$
4,075

Vølund & Other Renewable segment
1,015

SPIG segment
401

Corporate
1,524

 
$
7,015



25




(in thousands)
 
 
 
 
Three months ended June 30, 2018
Severance and related costs
Exit costs
Spin-off transaction costs
Total
Babcock & Wilcox segment
$
2,768

$
6

$
—

$
2,774

Vølund & Other Renewable segment
(53
)
—

—

(53
)
SPIG segment
366

—

—

366

Corporate
785

—

(46
)
739

 
$
3,866

$
6

$
(46
)
$
3,826


(in thousands)
 
 
 
 
Six months ended June 30, 2018
Severance and related costs
Exit costs
Spin-off transaction costs
Total
Babcock & Wilcox segment
$
3,860

$
150

$
—

$
4,010

Vølund & Other Renewable segment
441

—

—

441

SPIG segment
750

—

—

750

Corporate
5,157

—

330

5,487

 
$
10,208

$
150

$
330

$
10,688


In 2018, we began to implement a series of cost restructuring actions, primarily in our U.S., European, Canadian and Asian operations, and corporate functions. These actions were intended to appropriately size our operations and support functions in response to the continuing decline in certain global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale, the level of activity in our Vølund business and our liquidity needs. Severance expense is recognized over the remaining service periods of affected employees, and as of June 30, 2019, $0.7 million of total severance expense is remaining to be recognized based on actions taken through that date.

Restructuring liabilities are included in other accrued liabilities on our Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Balance at beginning of period 
10,196

5,914

$
7,359

$
2,320

Restructuring expense
936

4,276

7,015

10,164

Payments
(4,158
)
(2,308
)
(7,400
)
(4,602
)
Balance at June 30
$
6,974

$
7,882

$
6,974

$
7,882

 
Accrued restructuring liabilities at June 30, 2019 and 2018 relate primarily to employee termination benefits. Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the three and six months ended June 30, 2018, we recognized $0.2 million and $0.4 million, respectively, in non-cash restructuring expense related to losses on the disposals of long-lived assets.


26




NOTE 12 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
 
Pension Benefits
 
Other Benefits
 
Three months ended June 30,
Six months ended June 30,
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
 
2019
2018
2019
2018
Interest cost
$
10,965

$
9,741

$
21,822

$
19,498

 
$
119

$
95

$
239

$
192

Expected return on plan assets
(13,905
)
(16,215
)
(27,799
)
(32,445
)
 
—

—

—

—

Amortization of prior service cost
27

25

55

50

 
(539
)
(188
)
(1,078
)
(834
)
Recognized net actuarial loss (gain)
862

(544
)
1,260

(544
)
 
—

—

—

—

Benefit plans, net(1)
(2,051
)
(6,993
)
(4,662
)
(13,441
)
 
(420
)
(93
)
(839
)
(642
)
Service cost included in COS(2)
150

187

300

376

 
4

4

8

8

Net periodic benefit (benefit) cost
$
(1,901
)
$
(6,806
)
$
(4,362
)
$
(13,065
)
 
$
(416
)
$
(89
)
$
(831
)
$
(634
)
(1) 
Benefit plans, net, which is presented separately in the Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2) 
Service cost related to a small group of active participants is presented within cost of sales in the Condensed Consolidated Statement of Operations and is allocated to the Babcock & Wilcox segment.

Settlements are triggered in a plan when the distributions exceed the sum of the service cost and interest cost of the respective plan. Lump sum payments from our Canadian Plans resulted in plan settlements during the first and second quarters of 2019. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities that were losses of $0.9 million and $1.3 million in the three and six months ended June 30, 2019, respectively. Both the settlements and the MTM remeasurements are reflected in the Recognized net actuarial loss (gain) in the table above and are included in our Condensed Consolidated Statements of Operations in the Benefit plans, net line item.

During the second quarter of 2018, lump sum payments from our Canadian pension plan resulted in a plan settlement gain of $0.1 million, which also resulted in interim mark to market accounting for the pension plan. The mark to market adjustment in the second quarter of 2018 was a gain of $0.4 million. The effect of these charges and mark to market adjustments are reflected in the Recognized net actuarial loss (gain) in the table above. The recognized net actuarial (gain) loss was recorded in our Condensed Consolidated Statements of Operations in the Benefit plans, net line item. There were no lump sum payments from our Canadian pension plan during the first quarter of 2018.

We made contributions to our pension and other postretirement benefit plans totaling $1.4 million and $2.8 million during the three and six months ended June 30, 2019, respectively, as compared to $4.7 million and $8.5 million during the three and six months ended June 30, 2018, respectively. Expected employer contributions to the U.S. Pension Plan assume that relief is granted under pension contribution waivers that were filed with the IRS in January 2019 and are planned to be re-filed with the IRS later in 2019 or early in 2020, which would defer minimum pension contributions for approximately one year to then be repaid over a five-year period. If the temporary hardship waivers are not fully granted, required employer contributions in 2019 could increase up to approximately $15 million in 2019 and a similar or greater amount in 2020, each plus interest and, if assessed, penalties.

NOTE 13 – REVOLVING DEBT

The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
(in thousands)
June 30, 2019
December 31, 2018
United States
$
184,400

$
144,900

Foreign
—

606

Total revolving debt
$
184,400

$
145,506


U.S. Revolving Credit Facility

On May 11, 2015, we entered into "the Amended Credit Agreement" with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") which governs the U.S. Revolving

27




Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments ("the Amendments") to the Amended Credit Agreement, including those to avoid default. As of June 30, 2019, we were in compliance with the terms of the Amended Credit Agreement inclusive of Amendments No. 16 and No. 17. On April 5, 2019, we entered into Amendment No. 16 to the Amended Credit Agreement. Amendment No. 16 provides (i) $150.0 million in additional commitments from B. Riley FBR, Inc., under Tranche A-3 of last out term loans described in Note 14 and (ii) an incremental uncommitted facility of up to $15.0 million, to be provided by B. Riley or an assignee. Amendment No. 16 provides (i) $150.0 million in additional commitments from B. Riley FBR, Inc., under Tranche A-3 of last out term loans described in Note 14 and (ii) an incremental uncommitted facility of up to $15.0 million, to be provided by B. Riley or an assignee. On August 7, 2019, we entered into Amendment No. 17 to the Amended Credit Agreement, which clarifies the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts and resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019.

Amendment No. 16 to the Amended Credit Agreement also created a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, which effectively accelerated the maturity date of the U.S. Revolving Credit Facility from June 30, 2020. The U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to $347.0 million (reduced to $340.0 million in July 2019 as a result of the Loibl divestiture described in Note 25), as amended and adjusted for completed asset sales. The proceeds from loans under the U.S. Revolving Credit Facility are available for working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the amendment described below.

The Amended Credit Agreement and our cash management agreements with our lenders and their affiliates continue to be (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The U.S. Revolving Credit Facility 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, with the exception to the prepayment of certain Last Out Term Loans pursuant to the Equitization Transactions described in Note 18; such Last Out Term Loan prepayments are further limited by an aggregate principal amount of $86 million plus interest. The U.S. Revolving Credit Facility requires certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions. Such prepayments may require us to reduce the commitments under the U.S. Revolving Credit Facility by a corresponding amount of such prepayments.

After giving effect to the Amendments through June 30, 2019, revolving loans outstanding under the U.S. Revolving Credit Facility bear interest at our option at either (1) the LIBOR rate plus 6.0% per annum during 2019 and 7.0% per annum during 2020, or (2) the Base Rate plus 5.0% per annum during 2019, and 6.0% per annum during 2020. The Base Rate is 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. The components of our interest expense are detailed in Note 19. A commitment fee of 1.0% per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of $1.5 million was paid on the first business day of 2019, and a pro-rated amount is payable on the first business day of 2020. A deferred fee reduction from 2.5% to 1.5% became effective October 10, 2018, due to achieving certain asset sales. A letter of credit fee of 2.5% per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.5% per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Letter of credit fees are payable on the tenth business day after the last business day of each fiscal quarter.

In connection with Amendment No. 16, a contingent consent fee of $13.9 million (4.0% of total availability) is payable on December 15, 2019, but will be waived if certain actions are undertaken to refinance the facility by that date. We recorded the contingent consent fee as part of deferred financing fees in other current assets in the Condensed Consolidated Balance Sheets because it has been earned but may be waived, and it is being amortized to interest expense. See further discussion in Note 19. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of 1.0% of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental 1.0% per month after December 15, 2019.  No expense has been recognized for the deferred ticking fee because the company believes it is not probable of being earned by the lenders.

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. These include a maximum permitted senior debt leverage ratio

28




and a minimum consolidated interest coverage ratio, each as defined in the Amended Credit Agreement. Compliance with these ratios was waived with respect to the quarter ended December 31, 2018 and new ratios were established in Amendment No. 16 commencing with the quarter ended March 31, 2019. Amendment No. 16 also, among other items, (1) modifies the definition of EBITDA in the Credit Agreement to, among other things, include addbacks related to losses in connection with the Vølund projects, fees and expenses related to the Amendment and prior waivers to the Credit Agreement and fees associated with Vølund project related settlement agreements, (2) reduces to $30 million the minimum liquidity we are required to maintain at the time of any credit extension request and at the last business day of any calendar month, (3) allows for the issuance of up to $20.0 million of new letters of credit with respect to any future Vølund project, (4) changes the consolidated interest coverage and senior leverage coverage covenant ratios, (5) decreases the relief period borrowing sublimit, (6) changes or removes certain contract completion milestones that we had been required to meet in connection with one renewable energy project, (7) permits letters of credit to expire one year after the maturity of the revolving credit facility, (8) creates a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, (9) establishes a deferred ticking fee of 1.0% if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental 1.0% per month after December 15, 2019 and (10) provides for a contingent consent fee of 4.0% if certain actions are not undertaken to refinance the facility by December 15, 2019. Amendment No. 17, among other items, (1) clarifies from Amendment No. 16 the definition of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and (2) resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019.

Effective beginning April 5, 2019 with Amendment No. 16, the remaining maximum permitted senior debt leverage ratios, as defined in the Amended Credit Agreement, are as follows:

•9.25:1.00 for the quarter ending June 30, 2019
•6.75:1.00 for the quarter ending September 30, 2019
•6.00:1.00 for the quarter ending December 31, 2019
•3.50:1.00 for the quarter ending March 31, 2020
•3.25:1.00 for the quarter ending June 30, 2020
  
Effective beginning April 5, 2019 with Amendment No. 16, the remaining minimum consolidated interest coverage ratios, as defined in the Amended Credit Agreement, are as follows:

•0.90:1.00 for the quarter ending June 30, 2019
•1.10:1.00 for the quarter ending September 30, 2019
•1.10:1.00 for the quarter ending December 31, 2019
•1.50:1.00 for the quarter ending March 31, 2020
•1.75:1.00 for the quarter ending June 30, 2020

At June 30, 2019, borrowings under the U.S. Revolving Credit Facility consisted of $184.4 million at a weighted average interest rate of 9.13%. Usage under the U.S. Revolving Credit Facility consisted of $184.4 million of borrowings, $29.2 million of financial letters of credit and $114.8 million of performance letters of credit. At June 30, 2019, we had approximately $18.6 million available for borrowings or to meet letter of credit requirements primarily based on our overall facility size and our borrowing sublimit. The closing of the Loibl sale in June 2019 increased our borrowing capacity by $8.5 million due to the release of a performance letter of credit, effective June 24, 2019. In July 2019, the U.S. Revolving Credit Facility was reduced by $7.0 million due to the sale of Loibl, in accordance with the terms of the Amended Credit Agreement.

Foreign Revolving Credit Facilities

Outside of the United States, we had revolving credit facilities in Turkey that were used to provide working capital to local operations. At December 31, 2018, we had aggregate borrowings under these facilities of $0.6 million whose weighted average interest rate was 40.0%. In 2018, our banking counterparties in Turkey began requiring the conversion of these revolving credit facilities to be denominated in Turkish liras instead of euros, resulting in correspondingly higher market interest rates. As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.


29




Letters of Credit, Bank Guarantees and Surety Bonds

Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of June 30, 2019 and December 31, 2018 was $129.2 million and $175.9 million, respectively. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping letters of credit or bank guarantees was $31.3 million as of June 30, 2019. Of the letters of credit issued under the U.S. Revolving Credit Facility, $28.5 million are subject to foreign currency revaluation.

We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. 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 June 30, 2019, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $215.1 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $22.7 million.

Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.

NOTE 14 – LAST OUT TERM LOANS

The components of the Last Out Term Loans by Tranche are as follows:
 
June 30, 2019
(in thousands)
A-1
A-2
A-3
Total
Proceeds (1)
$
37,256

$
10,000

$
141,350

$
188,606

Discount and fees
—

—

8,650

8,650

Paid-in-kind interest
696

257

2,800

3,753

Principal
37,952

10,257

152,800

201,009

Unamortized discount and fees
(14
)
—

(17,939
)
(17,953
)
Net debt balance
$
37,938

$
10,257

$
134,861

$
183,056

(1) Tranche A-1 proceeds represent the estimated fair value of the tranche as of April 5, 2019, the date it was modified as discussed below.

 
December 31, 2018
(in thousands)
A-1
A-2
A-3
Total
Proceeds
$
30,000

$
—

$
—

$
30,000

Discount and fees
5,111

—

—

5,111

Paid-in-kind interest
132

—

—

132

Principal
35,243

—

—

35,243

Unamortized discount and fees
(4,594
)
—

—

(4,594
)
Net debt balance
$
30,649

$
—

$
—

$
30,649


Last Out Term Loans are incurred under our Amended Credit Agreement and are pari passu with the U.S. Revolving Credit Facility except for certain payment subordination provisions. The Last Out Term Loans are subject to the same representations and warranties, covenants and events of default under the Amended Credit Agreement. In connection with Amendment No. 16, the maturity date for all Last Out Term Loans was extended to December 31, 2020. As of June 30, 2019 and December 31, 2018, the Last Out Term Loans' net carrying values are presented as a current liability in our Condensed Consolidated Balance Sheets due to the uncertainty of our ability to refinance our U.S. Revolving Credit Facility as required by the Amended Credit Agreement (as described above).


30




As of June 30, 2019, after giving effect to Amendment No. 16, all outstanding Last Out Term Loans bear interest at a fixed rate per annum of 15.5% per annum. of which 7.5% is payable in cash and 8% is payable in kind. Upon completion of the 2019 Rights Offering (as defined below) on July 23, 2019, the interest rate on all outstanding Last Out Term Loans under the Amended Credit Agreement became a fixed rate per annum of 12% payable in cash. The total effective interest rate of Tranche A-1 was 15.98% and 25.38% on June 30, 2019 and December 31, 2018, respectively. Interest expense associated with the Last Out Term Loans is detailed in Note 19. Amendment No. 16 also permitted prepayment of up to $86.0 million of the Last Out Term Loans as contemplated under the Equitization Transactions described in Note 18.

Tranche A-1

We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley FBR, Inc., a related party, in three draws in September and October 2018. In November 2018, Tranche A-1 was assigned to Vintage Capital Management, LLC ("Vintage"), also a related party, who held the full amount of Tranche A-1 at June 30, 2019. The original face principal amount of Tranche A-1 is $30.0 million, which excludes a $2.0 million up-front fee that was added to the principal balance on the first funding date, transaction expenses, paid-in-kind interest, and original issue discounts of 10% for each draw under Tranche A-1.

On April 5, 2019, Amendment No. 16 and the Letter Agreement (defined in Note 18) modified Tranche A-1 by adding a substantive conversion option that required the conversion of the Tranche A-1 to common stock at $0.30 per share in connection with the Equitization Transactions described in Note 18, which was conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. Under U.S. GAAP, a debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The carrying value of the Tranche A-1 was $33.3 million on April 5, 2019 before the modification. The initial fair value of the new debt was estimated to be its initial principal value of $37.3 million. We recognized a loss on debt extinguishment of $4.0 million in the quarter ended June 30, 2019, primarily representing the unamortized value of the original issuance discount and fees on the extinguished debt.

As of June 30, 2019, Tranche A-1 was payable in full on December 31, 2020, the maturity date. Tranche A-1 may be prepaid, subject to the subordination provisions, but not re-borrowed. As described in Note 18, Tranche A-1 was exchanged for shares on July 23, 2019, after which no remaining amounts were outstanding.

Tranche A-2

On March 19, 2019, we entered into an amendment and limited waiver ("Amendment No. 15") to our Amended Credit Agreement, which allowed us to borrow $10.0 million of net proceeds from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. Interest rates were adjusted with Amendment No. 16 as described above. The total effective interest rate of Tranche A-2 was 15.93% on June 30, 2019. As of June 30, 2019, Tranche A-2 was payable in full on December 31, 2020 and may be prepaid, subject to the subordination provisions, but not re-borrowed. Interest rates of Tranche A-2 are described above. As described in Note 18, Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions.

Tranche A-3

Under Amendment No. 16, we borrowed $150.0 million face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The $141.4 million net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in Note 4, with the remainder used for working capital and general corporate purposes. Tranche A-3 included an original issue discount of 3.2% of the gross cash proceeds. An additional discount was recorded upon shareholder approval of the warrants and Equitization Transactions. These additional discounts totaled $8.1 million, which included $6.1 million for the estimated fair value of warrants issued to B. Riley, a related party, as described in Note 15 and Note 18 and $2.0 million for the intrinsic value of the beneficial conversion feature that allows conversion of a portion of the Tranche A-3 to equity under the Backstop Commitment described in Note 18. Both the warrants and the Backstop Commitment were contemplated in connection of the original extension of Tranche A-3.

Interest rates for Tranche A-3 are described above. The total effective interest rate of Tranche A-3 was 23.79% on June 30, 2019. Tranche A-3 may be prepaid, subject to the subordination provisions and as contemplated under the Equitization

31




Transactions as described above and in Note 18, but not re-borrowed. As part of the July 23, 2019 Equitization Transactions described in Note 18, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million inclusive of the $8.2 million of principal value exchanged for common shares under the Backstop Commitment.
Immediately after completion of the Equitization Transactions, the Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and $114.0 million including accrued paid-in-kind interest was outstanding on Tranche A-3, and it bears interest at a fixed rate of 12.0% per annum payable in cash.

NOTE 15 – WARRANTS

On July 23, 2019, 16,666,667 warrants were issued to certain entities affiliated with B. Riley in connection with the Equitization Transactions described in Note 18. Each warrant was to purchase one share of our common stock at an exercise price of $0.01 per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in Note 1, which adjusted the number of warrants to 1,666,666 and the exercise price remained $0.01 per share.

The warrants were contemplated in the April 5, 2019 Letter Agreement (defined in Note 18) and on June 14, 2019, the issuance of the warrants was approved by stockholders in the Company's annual stockholder meeting, which established the grant date for accounting purposes. The grant date fair value of the warrants was estimated to be $6.1 million using the Black-Scholes option pricing model. The warrants may not be put back to the Company for cash, and they qualify for equity classification. The grant date value of the warrants was included as part of the original-issue discount based on the relative fair value method for Tranche A-3 of the Last Out Term Loans described in Note 14 because the value was part of the consideration required by the Tranche A-3 lender in order to extend the Tranche A-3 loans.

The Black-Scholes option pricing model key assumptions are as follows:
Stock price
$
0.385

Exercise price
$
0.010

Time to expiration
3 years

Annualized volatility
121.00
%
Annual rate of quarterly dividends
—
%
Discount rate - bond equivalent rate
2.30
%
Expiration of option
April 5, 2022

Warrant value
$
0.38

 
NOTE 16 – COMMON SHARES

On June 14, 2019, after approval of the stockholders at the Company's annual meeting of stockholders, the Company amended its Amended and Restated Certificate of Incorporation to increase the authorized number of shares of the Company's common stock from 200,000,000 shares to 500,000,000 shares to allow for the Equitization Transactions described in Note 18. The reverse stock split on July 24, 2019, described in Note 1 did not affect the number of authorized shares.

On June 14, 2019, at the Company's annual meeting of stockholders, upon the recommendation of the Company's Board of Directors, the stockholders approved the Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (amended and restated as of June 14, 2019) (the "Fourth Amended and Restated 2015 LTIP"), which became effective upon such stockholder approval. The Fourth Amended and Restated 2015 LTIP, among other immaterial changes, increases the number of shares available for awards by 17,000,000 shares to a total of 29,271,731 shares of the Company's common stock, subject to adjustment as provided under the plan document. The increase in the maximum number of shares available for awards will allow us to establish the previously announced equity pool of 16,666,666 shares of its common stock for issuance for long-term incentive planning purposes. The shares available for award under the plan are subject to equitable adjustment for the reverse stock split described in Note 1 and other dilutive and antidilutive events.


32




NOTE 17 – RIGHTS OFFERINGS

2019 Rights Offering - Subsequent Event

On June 28, 2019, we distributed to holders of our common stock one nontransferable subscription right to purchase 0.986896 common shares for each common share held as of 5:00 p.m., New York City time, on June 27, 2019 at a subscription price of $0.30 per whole share of common stock (the "2019 Rights Offering"). The 2019 Rights Offering expired at 5:00 p.m., New York City time, on July 18, 2019, and settled on July 23, 2019. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2019 Rights Offering did not include an oversubscription privilege. Direct costs of the 2019 Rights Offering totaled $0.7 million for the three and six months ended June 30, 2019.

The 2019 Rights Offering resulted in the issuance of 139.3 million common shares (13.9 million common shares after the reverse stock split) as a result of the exercise of subscription rights in the offering. Gross proceeds from the 2019 Rights Offering were $41.8 million, $10.3 million which was used to fully repay Tranche A-2 of the Last Out Term Loans and the remaining $31.5 million was used to reduce outstanding borrowings under Tranche A-3 of the Last Out Term Loans. Concurrently with the closing of the 2019 Rights Offering, and in satisfaction of the Backstop Commitment as described in Note 18, the Company issued an aggregate of 27.4 million common shares (2.7 million common shares after the reverse stock split) in exchange for a portion of the Tranche A-3 Last Out Term Loans totaling $8.2 million, to B. Riley, a related party, as described in Note 24. The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization Transactions described in Note 18 and were approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.

2018 Rights Offering

On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase 1.4 million common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of $3.00 per common share (the "2018 Rights Offering"). On April 10, 2018, we extended the expiration date and amended certain other terms regarding the 2018 Rights Offering. As amended, each right entitled holders to purchase 2.8 million common shares at a price of $2.00 per share. The 2018 Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2018 Rights Offering did not include an oversubscription privilege.

The 2018 Rights Offering resulted in the issuance of 124.3 million common shares (12.4 million common shares after the reverse stock split) on April 30, 2018. Gross proceeds from the 2018 Rights Offering were $248.4 million. Of the proceeds received, $214.9 million was used to fully repay the Second Lien Credit Agreement, including $2.3 million of accrued interest, and the remainder was used for working capital purposes. Direct costs of the 2018 Rights Offering totaled $3.3 million. The shares issued in the 2018 Rights Offering were then subject to the one-for-ten reverse stock split described in Note 1.

NOTE 18 – EQUITIZATION TRANSACTIONS

In connection with Amendment No. 16 to the Amended Credit Agreement and the extension of Tranche A-3 of the Last Out Term Loans, the Company, B. Riley and Vintage, each related parties, entered into the "Letter Agreement" on April 5, 2019, pursuant to which the parties agreed to use their reasonable best efforts to effect a series of equitization transactions for a portion of the Last Out Term Loans, subject to, among other things, stockholder approval. Stockholder approval was received at the Company's annual stockholder meeting on June 14, 2019 and the contemplated transactions (the "Equitization Transactions") occurred on July 23, 2019. The Equitization Transactions included:

•
A $50.0 million rights offering ("2019 Rights Offering") as described in Note 17, for which B. Riley FBR, Inc. agreed to act as a backstop, by purchasing from us, at a price of $0.30 per share, all unsubscribed shares in the 2019 Rights Offering for cash or by exchanging an equal principal amount of outstanding Tranche A-2 or Tranche A-3 Last Out Term Loans (the "Backstop Commitment"). Under the 2019 Rights Offering, 166,666,667 shares of common stock were issued (16,666,666 shares of common stock after the reverse stock split), of which 125,891,701 shares (12,589,170 shares after the reverse stock split) were purchased through the exercise of rights in the rights offering generating $37.8 million of cash, 13,333,333 shares (1,333,333 shares after the reverse stock split) were issued through assigned portions of the Backstop Commitment generating an additional $4.0 million of cash, and the final 27,441,633 shares (2,744,163 shares after the reverse split) were exchanged for $8.2 million of principal value

33




including accrued paid-in-kind interest of Tranche A-3 Last Out Term Loans. Shares issued in the 2019 Rights Offering and under the Backstop Commitment were then subject to the one-for-ten reverse stock split described in Note 1 and Note 16.
•
$10.3 million of the proceeds of 2019 Rights Offering were used to fully repay Tranche A-2 of the Last Out Term Loans including accrued paid-in-kind interest.
•
$31.5 million of the proceeds of the 2019 Rights Offering were used to partially prepay Tranche A-3 of the Last Out Term Loans including paid-in-kind interest. The total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million inclusive of the $8.2 million of principal value exchanged for common shares under the Backstop Commitment described above.
•
All $38.2 million of outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest was exchanged for 127,207,856 shares (12,720,785 shares after the reverse stock split) of common stock (107,207,856 shares (10,720,785 shares after the reverse stock split) to Vintage and 20,000,000 shares (2,000,000 shares after the reverse stock split) to affiliates of B. Riley) at a price of $0.30 per share (the "Debt Exchange"). Prior to the Debt Exchange, $6.0 million of Tranche A-1 was held by affiliates of B. Riley and the remainder was held by Vintage. Shares issued under the Debt Exchange were then subject to the one-for-ten reverse stock split described in Note 1 and Note 16.
•
16,666,667 warrants, each to purchase one share of our common stock at an exercise price of $0.01 per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in Note 1, which adjusted the number of warrants to 1,666,666 and the exercise price remained $0.01.

Immediately after completion of the Equitization Transactions, Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and Tranche A-3 of the Last Out Term Loans had a balance of $114.0 million, including accrued paid-in-kind interest, which bears interest at a fixed rate of 12.0% per annum payable in cash and continues to bear the other terms described in Note 14. Based on Schedule 13D filings made by B. Riley and Vintage, as a result of the Equitization Transactions, Vintage increased its beneficial ownership in us to 32.8% and B. Riley increased its beneficial ownership in us to 18.4% inclusive of the outstanding warrants held by B. Riley.

NOTE 19 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION

In addition to non-cash items described in the Condensed Consolidated Statements of Cash Flows, we also recognized non-cash changes in our Condensed Consolidated Balance Sheets related to interest expense as described below:
 
Six months ended June 30,
(in thousands)
2019
2018
Accrued capital expenditures in accounts payable
$
—

$
123

Accreted interest expense on our Second Lien Term Loan Facility
$
—

$
3,202


The following cash activity is presented as a supplement to Condensed Consolidated Statements of Cash Flows and is included in Net cash used in operations:
 
Six months ended June 30,
(in thousands)
2019
2018
Income tax payments (refunds), net
$
32

$
2,938

 
 
 
Interest payments on our U.S. Revolving Credit Facility
$
6,921

$
4,599

Interest payments on our Last Out Term Loans
1,022

—

Interest payments on our Second Lien Term Loan Facility
—

7,627

Total cash paid for interest
$
7,943

$
12,226



34




Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Components associated with borrowings from:
 
 
 
 
U.S. Revolving Credit Facility
$
3,801

$
3,434

$
7,351

$
5,779

Last Out Term Loans - cash interest
3,606

—

4,119

—

Last Out Term Loans - paid-in-kind interest
3,881

—

4,941

—

Second Lien Term Loan Facility
—

2,191

—

7,460

Foreign Revolving Credit Facilities
—

145

—

279

 
11,288

5,770

16,411

13,518

Components associated with amortization or accretion of:
 
 
 
 
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
8,880

5,113

14,149

8,314

U.S. Revolving Credit Facility - contingent consent fee for Amendment 16 (1)
4,674

—

4,674

—

Last Out Term Loans - discount and financing fees
1,479

—

2,069

—

Second Lien Term Loan Facility - discount and financing fees
—

833

—

3,202

 
15,033

5,946

20,892

11,516

 
 
 
 
 
Other interest expense
516

161

668

295

 
 
 
 
 
Total interest expense
$
26,837

$
11,877

$
37,971

$
25,329

(1) 
As described in Note 13, in connection with Amendment No. 16, a contingent consent fee of $13.9 million (4.0% of total availability) is payable on December 15, 2019, but will be waived if certain actions are undertaken to refinance the facility by that date. We recorded the contingent consent fee as part of deferred financing fees in other current assets in the Condensed Consolidated Balance Sheets because it has been earned but may be waived, and it is being amortized to interest expense through December 15, 2019. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of 1.0% of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental monthly fee of 1.0% of total availability of the U.S. Revolving Credit Facility after December 15, 2019.  No expense has been recognized for the deferred ticking fee because the company believes it is not probable of being earned by the lenders.


35




The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the Condensed Consolidated Balance Sheets that sum to the total of the same amounts in the Condensed Consolidated Statements of Cash Flows:
(in thousands)
June 30, 2019
December 31, 2018
June 30, 2018
December 31, 2017
Held by foreign entities
$
30,932

$
35,522

$
27,955

$
42,490

Held by United States entities
4,258

7,692

557

1,227

Cash and cash equivalents of continuing operations
35,190

43,214

28,512

43,717

 
 
 
 
 
Reinsurance reserve requirements
5,350

11,768

25,269

21,061

Restricted foreign accounts
3,830

5,297

6,442

4,919

Sale proceeds held in escrow
—

—

591

—

Restricted cash and cash equivalents
9,180

17,065

32,302

25,980

Total cash, cash equivalents and restricted cash of continuing operations shown in the Condensed Consolidated Statements of Cash Flows
$
44,370

$
60,279

$
60,814

$
69,697

 
 
 
 
 
Total cash and cash equivalents of discontinued operations
$
—

$
—

$
10,437

$
12,950


Our U.S. Revolving Credit Facility described in Note 13 allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.

NOTE 20 – PROVISION FOR INCOME TAXES

In the three months ended June 30, 2019, income tax expense was $1.9 million, resulting in an effective tax rate of (7.15)%. We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the U.S. federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 19% and approximately 30%. 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. Our consolidated effective income tax rate can vary significantly from period to period due to these variations, changes in jurisdictional mix of our income and valuation allowances in certain jurisdictions that can offset income tax expense or benefit.

In the three months ended June 30, 2018, we recognized an income tax benefit of $1.9 million, resulting in an effective tax rate of 0.9%. Our effective tax rate for the three months ended June 30, 2018 was lower than our statutory rate primarily due to foreign losses in our Vølund & Other Renewable segment and disallowed interest expense pursuant to the United States Tax Cuts and Jobs Act (the "Tax Act") that are subject to valuation allowances as well as the impact of the $37.5 million non-deductible goodwill impairment and other nondeductible expenses, offset by favorable discrete items of $0.4 million. The effective tax rate for the three months ended June 30, 2018 also reflects the reduced federal corporate income tax rate enacted as part of the Tax Act and the impact of a change in our mix of domestic and foreign earnings.

In the six months ended June 30, 2019, income tax expense was $2.5 million, resulting in an effective tax rate of (3.3)%. Our effective tax rate for the six months ended June 30, 2019 is not reflective of the U.S. statutory rate primarily due to valuation allowances against our net deferred tax assets. In jurisdictions where we have available net operating loss carryforwards ("NOLs"), such as the U.S., Denmark and Italy, the existence of a full valuation allowance against deferred tax assets results in income tax benefit or expense relating primarily to discrete items. In other profitable jurisdictions, however, we may record income tax expense, even though we have established a full valuation allowance against our net deferred tax assets. We have unfavorable discrete items of $0.1 million in the six months ended June 30, 2019.

In the six months ended June 30, 2018, income tax expense was $5.0 million, an effective tax rate of (1.6)% that was lower than our statutory rate primarily due to the reasons noted above as well as an $18.4 million impairment of our equity method

36




investment in India that was offset by valuation allowances and unfavorable discrete items of $1.8 million in the first quarter. The discrete items include a valuation allowance on the net deferred tax assets of one of our foreign subsidiaries and the income tax effects of vested and exercised share-based compensation awards.

Sections 382 and 383 of the Internal Revenue Code ("IRC") limits for US federal income tax purposes, the annual use of NOL carryforwards (including previously disallowed interest carryforwards) and tax credit carryforwards, respectively, following an ownership change. Under IRC Section 382 (Section 382), a company has undergone an ownership change if shareholders owning at least 5% of the Company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company determined that a Section 382 ownership change occurred on July 23, 2019 as a result of the "Equitization Transactions" described in Note 18. As a result of this change in ownership, the Company estimated that the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) will become limited to approximately $1.2 million annually ($0.3 million tax effected). The Company is currently in the process of refining and finalizing these calculations. The Company maintains a full valuation allowance on its net deferred tax assets including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.

New Tax Act

The United States Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to the United States income tax law. Beginning in 2018, the Tax Act reduced the United States statutory corporate income tax rate from 35% to 21% and created a modified territorial system that will generally allow United States companies a full dividend received deduction for any future dividends from non-U.S. subsidiaries. In addition to the tax rate reduction and changes to the territorial nature of the US tax system, the Tax Act introduced a new limitation on interest deductions, a Foreign Derived Intangible Income (“FDII”) and new minimum tax on foreign sourced income, Global Low Taxed Intangible Income (“GILTI”). The Company will account for GILTI as a period cost in the year the tax is incurred. In 2019, we do not anticipate any FDII benefit or GILTI taxes but expect an interest limitation. This disallowed interest expense will be available for carryforward and is not subject to expiration but can only be used in a future year when the net interest expense for that period (including carryforward amounts) exceeds the relevant annual limitation.

NOTE 21 – CONTINGENCIES

Stockholder Class Action Litigation

On March 3, 2017 and March 13, 2017, the Company and certain of its former officers were named as defendants in two separate but largely identical complaints alleging violations of the federal securities laws. The two complaints were brought on behalf of a class of investors who purchased the Company's common stock between July 1, 2015 and February 28, 2017 and were filed in the United States District Court for the Western District of North Carolina (collectively, the "Stockholder Litigation"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. Through subsequent amendments, the putative class period was expanded to include investors who purchased shares between June 17, 2015 and August 9, 2017. The plaintiff in the Stockholder Litigation alleges fraud, misrepresentation and a course of conduct relating to certain projects undertaken by the Vølund & Other Renewable segment, which, according to the plaintiff, had the effect of artificially inflating the price of the Company's common stock. The plaintiff further alleges that stockholders were harmed when the Company later disclosed that it would incur losses on these projects. The plaintiff seeks an unspecified amount of damages.

On November 13, 2017, defendants filed a motion to dismiss (“MTD”) in the Stockholder Litigation, and on December 28, 2017, plaintiff filed its opposition to the MTD. The federal trial court judge denied the MTD on February 8, 2018, which allowed the case to proceed. After engaging in some discovery, the parties held a mediation on December 14, 2018 to discuss possible settlement of the Stockholder Litigation. The parties did not successfully resolve the Stockholder Litigation at the December 14, 2018 mediation. Following a period of additional discovery, the parties held a second mediation on April 16, 2019. At the second mediation, the parties reached an agreement in principle to settle the Stockholder Litigation, which is subject to court approval. The agreement requires defendants to pay or cause to be paid $19.5 million into a settlement fund. The $19.5 million payment is expected to be covered in full by certain of our insurance carriers. The parties have subsequently executed a stipulation of settlement and have and have submitted it to the Court for its preliminary approval. Within our Condensed Consolidated Balance Sheets as of March 31, 2019, the $19.5 million liability is recorded in other accrued liabilities and the $19.5 million insurance receivable is recorded in accounts receivable - other.


37




We believe the allegations in the Stockholder Litigation were without merit, and that the outcome of the Stockholder Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash
flows, net of any insurance coverage.

Derivative Litigation

On February 16, 2018 and February 22, 2018, the Company and certain of its present and former officers and directors were named as defendants in three separate but substantially similar derivative lawsuits filed in the United States District Court for the District of Delaware (the "Federal Court Derivative Litigation"). On April 23, 2018, the United States District Court for the District of Delaware entered an order consolidating the related derivative actions and designating co-lead and co-liaison counsel. On June 1, 2018, plaintiffs filed a consolidated derivative complaint. Plaintiffs assert a variety of claims against the defendants including alleged violations of the federal securities laws, waste, breach of fiduciary duties and unjust enrichment. Plaintiffs, who purport to be current stockholders of the Company's common stock, are suing on behalf of the Company to recover costs and an unspecified amount of damages, and to force the implementation of certain corporate governance changes. On June 28, 2018, the Federal Court Derivative Litigation was transferred to the United States District Court for the Western District of North Carolina, where the Stockholder Litigation is pending. The parties filed a motion to stay the Federal Court Derivative Litigation, which was granted by the Court on August 13, 2018.

On November 14, 2018, the Company and certain of its present and former officers and directors were named as defendants in an additional shareholder derivative lawsuit filed in the North Carolina Superior Court (the "State Court Derivative Litigation"). The complaint in that action covers the same period and contains allegations substantially similar to those asserted in the pending Federal Court Derivative Litigation.

The parties to the Federal Court and State Court Derivative Litigations held a mediation on April 17, 2019 in an attempt to resolve these pending matters. At this mediation, the parties reached an agreement in principle with plaintiffs' counsel to resolve these cases based on certain corporate governance changes that the Company has already implemented or is willing to implement in the future and payment by certain of the Company's insurance carriers of $1 million in attorneys' fees and expenses to plaintiffs' counsel.  There is no other monetary payment associated with this settlement. The parties subsequently executed a stipulation of settlement and have submitted it to the Federal Court for its preliminary approval.

We believe the allegations in the Federal Court Derivative Litigation and State Court Derivative Litigation were without merit, and that the outcome of the Derivative Litigations will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.

Litigation Relating to the Equitization Transactions

On May 28, 2019, a putative class action complaint was filed against the Board in the Court of Chancery of the State of Delaware. The complaint is captioned Price v. Avril, et al., C.A. No. 2019-0393-JRS (Del. Ch.). The complaint asserted, among other things, that the Board breached their fiduciary duties by failing to disclose all material information necessary for a fully-informed vote on certain of the proposals presented for consideration at the annual meeting of the Company's stockholders. The plaintiff also filed a motion to preliminarily enjoin the stockholder vote on the proposals unless and until all material information regarding the proposals was disclosed to the Company’s stockholders. The plaintiff withdrew her motion to preliminarily enjoin the stockholder vote on the proposals following the Company’s issuance of a supplemental proxy statement on June 6, 2019. The Court granted the plaintiff's request to voluntarily dismiss this action with prejudice on July 31, 2019, and retained jurisdiction solely for the purpose of adjudicating an anticipated application for attorneys' fees and expenses incurred by plaintiff's counsel.

In addition, on June 3, 2019, a second putative class action complaint was filed against the Company, the Board and Mr. Young in the United States District Court for the District of Delaware. The complaint is captioned Kent v. Babcock & Wilcox Enterprises, Inc., et. al., No. 1:19-cv-01032-MN (D. Del.). The complaint asserts, among other things, claims under Sections 14(a) and 20(a) of the Exchange Act for allegedly disseminating a materially incomplete and misleading proxy statement in connection with the Equitization Transactions, which was filed with the SEC on May 13, 2019. The complaint seeks an order rescinding the Equitization Transactions or, in the alternative, awarding monetary damages as well as other relief. The plaintiff has yet to serve process on the Company, the Board or Mr. Young in this action. The Company, the Board and Mr. Young believe that the plaintiff’s allegations in the complaint lack merit and intend to vigorously defend against the action.


38




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.

NOTE 22 – COMPREHENSIVE INCOME

Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first two quarters of 2019 and 2018 were as follows:
(in thousands)
Currency translation (loss) gain
Net unrealized gain (loss) on derivative instruments (1)
Net unrecognized loss related to benefit plans (net of tax)
Total
Balance at December 31, 2018
$
(10,834
)
$
1,362

$
(1,960
)
$
(11,432
)
Other comprehensive income (loss) before reclassifications
10,260

(1,178
)
—

9,082

Reclassified from AOCI to net income (loss)
—

224

(356
)
(132
)
Net other comprehensive income (loss)
10,260

(954
)
(356
)
8,950

Balance at March 31, 2019
$
(574
)
$
408

$
(2,316
)
$
(2,482
)
Other comprehensive loss before reclassifications
(7,979
)
(189
)
—

(8,168
)
Reclassified from AOCI to net income (loss)
3,176

(22
)
(514
)
2,640

Net other comprehensive (loss) income
(4,803
)
(211
)
(514
)
(5,528
)
Balance at June 30, 2019
$
(5,377
)
$
197

$
(2,830
)
$
(8,010
)
(1) The remaining unrealized FX gain is expected to be recognized over time as the related projects are completed.


39




(in thousands)
Currency translation (loss) gain
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, 2017
$
(27,837
)
$
38

$
1,737

$
3,633

$
(22,429
)
ASU 2016-1 cumulative adjustment(1) 
—

(38
)
—

—

(38
)
Other comprehensive income (loss) before reclassifications
3,223

—

1,224

(55
)
4,392

Reclassified from AOCI to net (loss) income
(2,044
)
—

(1,272
)
(384
)
(3,700
)
Net other comprehensive income (loss)
1,179

(38
)
(48
)
(439
)
654

Balance at March 31, 2018
$
(26,658
)
$
—

$
1,689

$
3,194

$
(21,775
)
Other comprehensive income (loss) before reclassifications
8,517

—

(513
)
112

8,116

Reclassified from AOCI to net income (loss)
—

—

381

(427
)
(46
)
Amounts reclassified from AOCI to pension, other accumulated postretirement benefit liabilities and deferred income taxes
—

—

—

(2,831
)
(2,831
)
Net other comprehensive income (loss)
8,517

—

(132
)
(3,146
)
5,239

Balance at June 30, 2018
$
(18,141
)
$
—

$
1,557

$
48

$
(16,536
)
(1) ASU 2016-1, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, requires investments to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income (loss). The standard was effective as of January 1, 2018 and requires application by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
 
The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
AOCI component
Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI
Three months ended June 30,
Six months ended June 30,
2019
2018
2019
2018
Release of currency translation gain with the sale of equity method investment and the sale of business
Equity in income and impairment of investees
$
—

$
—

$
—

$
2,044

 
Loss on sale of business
(3,176
)
—

(3,176
)
—

 
Net (loss) income
$
(3,176
)
$
—

$
(3,176
)
$
2,044

 
 
 
 
 
 
Derivative financial instruments
Revenues
$
—

$
(478
)
$
—

$
1,138

 
Cost of operations
—

(11
)
—

1

 
Other
22

—

(202
)
—

 
Total before tax
22

(489
)
(202
)
1,139

 
(Benefit) provision for income taxes
—

(108
)
—

248

 
Net income (loss)
$
22

$
(381
)
$
(202
)
$
891

 
 
 
 
 
 
Amortization of prior service cost on benefit obligations
Benefit plans, net
$
514

$
427

$
870

$
811

 
Net income
$
514

$
427

$
870

$
811



40




NOTE 23 – FAIR VALUE MEASUREMENTS

The following tables summarize 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
June 30, 2019
Level 1
Level 2
Level 3
Corporate notes and bonds
$
12,844

$
12,844

$
—

$
—

Mutual funds
593

—

593

—

United States Government and agency securities
3,296

3,296

—

—

Total fair value of available-for-sale securities
$
16,733

$
16,140

$
593

$
—


(in thousands)
 
 
 
 
Available-for-sale securities
December 31, 2018
Level 1
Level 2
Level 3
Corporate notes and bonds
$
13,028

$
13,028



$
—

Mutual funds
1,283

—

1,283

—

United States Government and agency securities
1,437

1,437

—

—

Total fair value of available-for-sale securities
$
15,748

$
14,465

$
1,283

$
—


(in thousands)
 
 
Derivatives
June 30, 2019
December 31, 2018
Forward contracts to purchase/sell foreign currencies
$
—

$
546


Available-For-Sale Securities

Our investments in available-for-sale securities are presented in other assets on our Condensed Consolidated Balance Sheets with contractual maturities ranging from 0-6 years.

Derivatives

Derivative assets and liabilities usually 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. As of June 30, 2019, we do not hold any derivative assets or liabilities; the last of our derivative contracts were sold during the first quarter of 2019.

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 Condensed 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 and Last Out Term Loans. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as 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 June 30, 2019 and December 31, 2018.
•
Warrants.The fair value of the warrants was established using the Black-Scholes option pricing model value approach.


41




Non-Recurring Fair Value Measurements

The measurement of the net actuarial gain or loss associated with our pension and other postretirement plans was determined using unobservable inputs (see Note 12). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.

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 based on an income approach using a discounted cash flow analysis or based on the price that the Company expects to receive upon the sale of these assets. Both of those approaches utilize unobservable inputs (see Note 11 and Note 6).

NOTE 24 – RELATED PARTY TRANSACTIONS

The Letter Agreement described in Note 18 between B. Riley Financial, Inc. (together with its affiliates, "B. Riley"), Vintage Capital Management, LLC ("Vintage") and the Company included agreement to negotiate one or more agreements that provide B. Riley and Vintage with certain governance rights, including (i) the right for B. Riley and Vintage to each nominate up to three individuals to serve on our board of directors, subject to certain continued lending and equity ownership thresholds and (ii) pre-emptive rights permitting B. Riley to participate in future issuances of our equity securities. The size of our board of directors is currently expected to remain at seven directors. On April 30, 2019, the Company entered into an Investor Rights Agreement with B. Riley Financial, Inc. and Vintage providing the governance rights contemplated by the Letter Agreement. The Company also entered into a Registration Rights Agreement with B. Riley Financial, Inc. and Vintage on April 30, 2019 providing each of B. Riley Financial, Inc. and Vintage with certain customary registration rights for the shares of our common stock that they hold.

Transactions with B. Riley and its Affiliates

B. Riley Financial, Inc. and its affiliates became the beneficial owner of greater than five percent of our common stock in May 2018, upon completion of the 2018 Rights Offering described in Note 17. Based on its Schedule 13D filing made on May 7, 2019, B. Riley beneficially owned 6.6% of our outstanding common stock as of June 30, 2019. Based on its Schedule 13D filings following the completion of the Equitization Transactions described in Note 18, B. Riley beneficially owns 18.4% of our outstanding common stock, inclusive of the warrants further described in Note 15, as of July 23, 2019.

B. Riley is party to the Last Out Term Loans as described in Note 14 and Note 18 and was a party to the Equitization Transactions described in Note 18, which included providing the Backstop Commitment to the 2019 Rights Offering described in Note 17 and Note 18 and receiving warrants as described in Note 15 and Note 18.

We entered an agreement with BPRI Executive Consulting, LLC on November 19, 2018 for the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020, unless terminated by either party with thirty days written notice. Under this agreement, payments are $0.75 million per annum, paid monthly. Subject to the achievement of certain performance objectives as determined by the Compensation Committee of the Board, a bonus or bonuses may also be earned and payable to BPRI Executive Consulting, LLC. In June 2019, we granted a total of $2.0 million in cash bonuses to BRPI Executive Consulting LLC, an affiliate of B. Riley, for Mr. Young's performance and services. In December 2018, we granted a total of 8.4 million stock appreciation rights to BRPI Executive Consulting, LLC, ("Non-employee SARs"). The Non-employee SARs expire ten years after the grant date and vest 100% upon completion after the required years of service. Upon vesting, the Non-employee SARs may be exercised within ten business days following the end of any calendar quarter during which the volume weighted average share price is greater than the per share price goal of $2.25 for 5.1 million of the Non-employee SARS and $2.50 for the remaining 3.3 million of Non-employee SARS. Upon exercise of the Non-employee SARs, the holder receives a cash-settled payment equal to the number of Non-employee SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the Non-employee SARs base price of $2.00 per stock appreciation right. Non-employee SARs are issued under a Non-employee SARs agreement. The Non-employee SARs are subject equitable adjustment for the one-for-ten reverse stock split described in Note 1.


42




Transactions with Vintage Capital Management, LLC
 
Based on its Schedule 13D filing on May 2, 2019, Vintage beneficially owned 14.9% of our outstanding common stock as of June 30, 2019. Based on its Schedule 13D filings following the completion of the Equitization Transactions described in Note 18, Vintage beneficially owns 32.8% of our outstanding common stock as of July 23, 2019.

Vintage was a party to Tranche A-1 of the Last Out Term Loans as described in Note 14 and Note 18 and was a party to the Equitization Transactions described in Note 18, which included participation in the 2019 Rights Offering described in Note 17 and Note 18 and conversion of Tranche A-1 of the Last Out Term Loans in the Debt Exchange as described in Note 14 and Note 18. Prior to Debt Exchange, $6.0 million of Tranche A-1 had been transferred or sold to affiliates of B. Riley and the remainder was held by Vintage.

On April 10, 2018, the Company and Vintage entered into an equity commitment agreement (the "Equity Commitment Agreement"), which Equity Commitment Agreement amended and restated in its entirety the prior letter agreement, dated as of March 1, 2018, between the Company and Vintage, pursuant to which Vintage agreed to backstop the 2018 Rights Offering for the purpose of providing at least $245 million of new capital.

On July 23, 2019, concurrent with the completion of the 2019 Rights Offering, described in Note 17, the Tranche A-1 principal and paid-in-kind interest totaling $38.2 million was exchanged for 127.2 million of our common shares of which 107.2 million of common shares were issued to Vintage, a related party, and the remainder were issued to B.Riley, also a related party, described above.

NOTE 25 – DIVESTITURE

Effective May 31, 2019, we sold all of the issued and outstanding capital stock of Loibl, a material handling business in Germany, to Lynx Holding GmbH for €10.0 million (approximately $11.4 million), subject to adjustment. We received $7.4 million in cash and recognized a $3.6 million pre-tax loss on sale of this business in the quarter ended June 30, 2019, net of $0.7 million in transaction costs. Proceeds from the transaction were primarily used to reduce outstanding balances under our U.S. Revolving Credit Facility. Through the sale, we were also able to release performance letters of credit totaling $8.5 million, which improved our borrowing capacity as described in Note 13. Prior to the divestiture, Loibl was part of the Vølund & Other Renewable segment and had revenues of approximately $30 million for the year ended December 31, 2018.

NOTE 26 – DISCONTINUED OPERATIONS

On October 5, 2018, we sold all of the capital stock of our MEGTEC and Universal businesses to Dürr Inc., a wholly owned subsidiary of Dürr AG ("Dürr"), pursuant to a stock purchase agreement executed on June 5, 2018 for $130.0 million, subject to adjustment. We received $112.0 million in cash, net of $22.5 million in cash sold with the businesses, and $7.7 million, which was deposited in escrow pending final settlement of working capital and other customary matters. We primarily used proceeds from the transaction to reduce outstanding balances under our U.S. Revolving Credit Facility and for working capital purposes. During the quarter ended June 30, 2019, we received $1.5 million that was released from escrow. For the three and six months ended Jun 30, 2019, $0.7 million of pretax income from discontinued operations was recognized primarily for the release of an accrued liability. On July 1, 2019, $2.7 million was released from escrow to Dürr. The remaining escrow matters are expected to be resolved within 18 months from the closing date.


43




The following table presents selected financial information regarding the discontinued operations of our former MEGTEC and Universal businesses included in the Condensed Consolidated Statements of Operations:
(in thousands)
Three months ended June 30, 2018
Six months ended June 30, 2018
Revenue
$
58,257

$
116,439

Cost of operations
45,521

90,189

Selling, general and administrative
7,597

17,024

Goodwill impairment
72,309

72,309

Research and development
390

756

Operating income (loss)
(67,560
)
(63,839
)
Net loss
(55,932
)
(59,428
)

The significant components of discontinued operations of our former MEGTEC and Universal businesses included in our Condensed Consolidated Statements of Cash Flows are as follows:
(in thousands)
Six months ended June 30, 2018
Depreciation and amortization
$
3,036

Goodwill impairment
72,309

Provision for deferred income taxes
(815
)
Purchase of property, plant equipment
77


NOTE 27 – NEW ACCOUNTING STANDARDS

New accounting standards adopted are summarized as follows:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application and continued applying the guidance under the lease standard in effect at that time to the comparative periods presented in the Condensed Consolidated Financial Statements. We recorded an immaterial cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. We also elected the "package of practical expedients", which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. However, we are not electing to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840.

We have implemented new leasing software and established new processes and internal controls designed to comply with the new lease accounting and disclosure requirements set by the new standard. The impact of the standard upon adoption increased our assets and liabilities within our Condensed Consolidated Balance Sheets by approximately $16 million but did not materially impact our results of operations or cash flows.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance provides companies with the option to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. Existing guidance requiring the effect of a change in tax law or rates to be recorded in continuing operations is not affected. This standard is effective for all public business entities for fiscal years beginning after December 15, 2018, and any interim periods within those fiscal years. We did not elect to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.

New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires companies acting as the customer in a cloud hosting service arrangement to follow the requirements of ASC 350-40 for capitalizing implementation costs for internal-use software and requires the amortization of

44




these costs over the life of the related service contract. This standard is effective for all public business entities for fiscal years beginning after December 15, 2019, and any interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating the impact of this standard on our financial statements and whether we will elect to adopt this standard early.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

***** Cautionary Statement Concerning Forward-Looking Information *****

This quarterly 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: our ability to continue as a going concern; our ability to obtain and maintain sufficient financing to provide liquidity to meet our business objectives, surety bonds, letters of credit and similar financing; our ability to satisfy requirements under the Amended Credit Agreement; 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 involved; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform contracts on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; failure by third-party subcontractors, partners or suppliers to perform their obligations on time and as specified; our ability to realize anticipated savings and operational benefits from our restructuring plans, and other cost-savings initiatives; our ability to successfully address remaining items and any warranty obligations within our accrued estimated costs for our Vølund & Other Renewable segment; our ability to successfully partner with third parties to win and execute contracts within the Vølund & Other Renewable segment; changes in our effective tax rate and tax positions, including any limitation on our ability to use our net operating loss carryforwards and other tax assets as a result of an "ownership change" under Section 382 of the Internal Revenue Code; 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 to recognize revenue over time; 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; actual of anticipated changes in governmental regulation, including trade and tariff policies; 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; changes in actuarial assumptions and market fluctuations that affect our net pension liabilities and income; 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; the willingness of customers and suppliers to continue to do business with us on reasonable terms and conditions as well as our ability to successfully consummate strategic alternatives for non-core assets, if we determine to pursue them; and our ability to maintain the listing of our common stock on the NYSE. These factors include the cautionary statements included in this report and the factors set forth under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018, as amended ("Annual Report") filed with the Securities and Exchange Commission.

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 quarterly report or the Annual report for any reason, except as required by law.

45





OVERVIEW OF RESULTS

In this report, unless the context otherwise indicates, "BW," "we," "us," "our" and "the Company" mean Babcock & Wilcox Enterprises, Inc. and its consolidated subsidiaries. The presentation of the components of our revenues, gross profit and earnings before interest, taxes, depreciation and amortization ("EBITDA"), as reconciled in the table on the following pages of this Management's Discussion and Analysis of Financial Condition and Results of Operations is consistent with the way our chief operating decision maker reviews the results of operations and makes strategic decisions about the business.

We recorded operating losses of $4.3 million and $36.2 million in the three and six months ended June 30, 2019, respectively, compared to losses of $137.4 million and $243.8 million in the three and six months ended June 30, 2018, respectively, and we showed improved results from each of our operating segments. Prior to 2019, the most significant driver of our operating losses was the charges for the six European Vølund EPC loss contracts. The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services. In the three and six months ended June 30, 2019, we recorded $3.2 million and $7.4 million, respectively, in net losses compared to losses of $57.3 million and $110.0 million in the three and six months ended June 30, 2018, respectively, from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. Aside from these loss projects, we have one remaining extended scope contract in our Vølund business, for which we continue to expect a small profit; this contract is expected to be turned over to our customer in the third quarter of 2019.

As of June 30, 2019, five of the six European Vølund EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the March 29, 2019 settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined £70 million ($91.5 million) on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately $144 million), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. Upon completion of these activities in accordance with the settlement, we will have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed. We estimated the portion of this settlement related to waiver of the rejection right on the fifth project was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. We are still pursuing insurance recoveries and claims against subcontractors. For the second loss project, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant. See further discussion of the loss projects in Note 4.

The SPIG segment contributed to our operating results with $(0.1) million and $0.5 million of adjusted EBITDA in the three and six months ended June 30, 2019, respectively, compared to $(6.2) million and $(13.5) million in the three and six months ended June 30, 2018, respectively. The improvement begins to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG's adjusted EBITDA loss in the first half of 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts is a loss contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S., which continued through the first half of 2019 and is expected to be complete in mid-2019.

Our Babcock & Wilcox segment generated adjusted EBITDA of $19.0 million and $28.0 million in the three and six months ended June 30, 2019, respectively, compared to $9.9 million and $14.1 million in the three and six months ended June 30, 2018, respectively. The increase is primarily attributable to higher volume of large construction new build projects, including industrial projects, and lower warranty expenses partly offset by a decrease in volume of parts and retrofits.

Through our restructuring efforts, we made significant strides to make our cost structure more variable and to reduce costs. We have identified additional initiatives that are underway as of the date of this filing that are expected to further reduce

46




costs, and we expect to continue to explore other cost saving initiatives to improve cash generation and to evaluate additional non-core asset sales to reduce our debt.

Comparisons of our results from continuing operations for the three and six months ended June 30, 2019 to the corresponding periods of 2018 were also affected by the following:
•
$3.6 million of loss on sale of business was recognized in the three months ended June 30, 2019 for a non-core materials handling business in Germany, Loibl GmbH, as described in Note 25.
•
$0.9 million and $7.0 million of restructuring and spin-off costs were recognized in the three and six months ended June 30, 2019, respectively, compared to $3.8 million and $10.7 million of restructuring and spin-off costs recognized in the three and six months ended June 30, 2018. The actions in the first six months of 2019 primarily related to severance. In the first six months of 2018 restructuring costs related primarily to executive severance and the remaining severance costs of prior restructuring initiatives.
•
$3.2 million and $7.2 million of financial advisory services were recorded in the three and six months ended June 30, 2019, respectively, as compared to $5.1 million and $8.2 million in the corresponding periods of 2018. These services are requirements of the U.S. Revolving Credit Facility.
•
$6.6 million of cost was recognized in the six months ended June 30, 2019 for costs of a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement limits our obligations to our core scope activities and eliminates risk related to acting as the prime EPC should the project have moved forward.
•
$1.6 million and $4.7 million of legal and other advisory fees were recognized in the three and six months ended June 30, 2019, respectively, related to the contract settlements described above and in Note 4 and for liquidity planning.
•
$2.0 million and $4.0 million of accelerated depreciation expense in the three and six months ended June 30, 2019, respectively, for fixed assets affected by our September 2018 announcement to consolidate office space and relocate our global headquarters to Akron, Ohio expected in the fourth quarter 2019.
•
$0.9 million and $1.3 million of actuarially determined mark to market ("MTM") losses from our Canadian pension plan was recognized in the three and six months ended June 30, 2019, respectively, compared to $0.5 million of MTM gains from our Canadian pension plan in the three months ended June 30, 2018. MTM losses are further described in Note 12.
•
$37.5 million to fully impair goodwill related to our SPIG reporting unit in the second quarter of 2018. 
•
$18.4 million of other-than-temporary impairment was recognized in the six months ended June 30, 2018 for our interest in TWBES, an equity method investment in India based on an agreement to sell our ownership interest.
•
$6.5 million of gain on sale was recognized during the first quarter 2018 for our equity method investment in China and is included in Equity in income and impairment of investees.

We face liquidity challenges from losses recognized on our six European Vølund EPC loss contracts described in Note 4, which have required amendments and waivers to maintain compliance with the Amended Credit Agreement, inclusive of Amendments No. 16 and No. 17. Our liquidity is provided under a credit agreement dated May 11, 2015, as amended, with a syndicate of lenders ("Amended Credit Agreement") that governs a revolving credit facility ("U.S. Revolving Credit Facility") and our last out term loan facility ("Last Out Term Loans"). The Amended Credit Agreement and the amendments and waivers are described in more detail in Note 13, Note 14 and Note 18.

To address our liquidity needs and the going concern uncertainty, we have taken the following actions in 2019 as follows:
•
completed equitization transactions on July 23, 2019 as described in Note 18 and Note 17, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise $50.0 million that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans;
•
executed a one-for-ten reverse stock split of our issued and outstanding common stock, which became effective on July 24, 2019;
•
completed the sale of a non-core materials handling business in Germany, Loibl GmbH ("Loibl") effective May 31, 2019 for €10.0 million (approximately $11.4 million), subject to adjustment, resulting in net receipt of $7.4 million;
•
received $150.0 million in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in Note 14, from B. Riley FBR, Inc., a related party, on April 5, 2019;

47




•
received $10.0 million in net proceeds from Tranche A-2 of the Last Out Term Loans, described in Note 14, from B. Riley Financial, Inc. (together with its affiliates, including B. Riley FBR, Inc., "B. Riley"), a related party, on March 20, 2019;
•
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in Note 4, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans;
•
entered into an additional settlement as described in Note 4 in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started, whereby our obligations and our risk from acting as the prime EPC should the project move forward was eliminated;
•
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in Note 13 and Note 14, the most recent of which were Amendments No. 16 and No. 17, dated April 5, 2019 and August 7, 2019, respectively, which provided Tranche A-3 of the Last Out Term Loans described above and in Note 14, reset the financial and other covenants, adjusted the interest rate of the Last Out Term Loans, reset the maturity date of the Last Out Term Loans to December 31, 2020, increased borrowing capacity under the U.S. Revolving Credit Facility by reducing the minimum liquidity requirement, allowed for the issuance of a limited amount of new letters of credit with respect to any future Vølund project, permitted other letters of credit to expire up to one year after the maturity of the U.S. Revolving Credit Facility, clarifies (Amendment No. 17) the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019; and
•
filed and plan to file for waiver of required minimum contributions to the U.S. Pension Plan as described in Note 12, that if granted, would reduce cash funding requirements in 2019 by approximately $15 million and a similar or greater amount in 2020 and would increase contributions over the following five years. The waiver request for the first plan year remains under review by the IRS and the waiver request for the second plan year is expected to be filed later in 2019 or early 2020.

Management believes it has taken and is continuing to take prudent actions to address the substantial doubt regarding our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face because some matters may not fully be in our control. Amendment No. 16 to the Amended Credit Facility also created a new event of default for failure to terminate the existing U.S. Revolving Credit Facility on or prior to March 15, 2020, which is within twelve months of the date of this filing. Our ability to comply with the financial and other covenants of the Amended Credit Facility through that date are dependent upon achieving our forecasted financial results. While management believes it will be able to obtain additional financing to replace our U.S. Revolving Credit facility, the ability to do so will depend on credit markets and other matters that are outside of our control.

In addition to the discussions regarding additional financing described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Our primary measures of segment profitability are gross profit and adjusted earnings before interest, tax, depreciation and amortization ("EBITDA"). The presentation of the components of our gross profit and adjusted EBITDA in the tables below are consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, mark to market ("MTM") pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment. Beginning in the first quarter of 2019, pension benefit (expense), which affected only the Babcock & Wilcox segment, is also not allocated to adjusted EBITDA of the segments. Prior periods have been conformed to be comparable. Adjusted EBITDA for each segment is presented below with a reconciliation to net income. Adjusted EBITDA is not a recognized term under GAAP and should not be considered in isolation or as an alternative to net earnings (loss), operating profit (loss) or cash flows from operating activities as a measure of our liquidity. Adjusted EBITDA as presented below differs from the calculation used to compute our leverage ratio and interest coverage ratio as defined by our U.S.

48




Revolving Credit Facility. Because all companies do not use identical calculations, the amounts presented for adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
 
Three months ended June 30,
Six months ended June 30,
(In thousands)
2019
2018
$ Change
2019
2018
$ Change
Revenues:
 
 
 
 
 
 
Babcock & Wilcox segment
$
200,964

$
197,752

$
3,212

$
389,522

$
356,878

$
32,644

Vølund & Other Renewable segment
33,695

55,002

(21,307
)
63,227

114,960

(51,733
)
SPIG segment
22,834

46,015

(23,181
)
51,736

82,759

(31,023
)
Eliminations
(9,378
)
(7,432
)
(1,946
)
(24,434
)
(10,084
)
(14,350
)
 
248,115

291,337

(43,222
)
480,051

544,513

(64,462
)
Gross profit (loss)(1):
 
 
 


 
 
Babcock & Wilcox segment
37,853

30,013

7,840

68,959

60,876

8,083

Vølund & Other Renewable segment
5,057

(69,329
)
74,386

2,201

(119,778
)
121,979

SPIG segment
2,388

79

2,309

6,064

(2,672
)
8,736

Intangible amortization expense included in cost of operations
(1,014
)
(1,829
)
815

(2,071
)
(3,661
)
1,590

 
44,284

(41,066
)
85,350

75,153

(65,235
)
140,388

Selling, general and administrative ("SG&A") expenses
(41,948
)
(46,948
)
5,000

(84,217
)
(106,120
)
21,903

Advisory fees and settlement costs
(4,778
)
(5,142
)
364

(18,388
)
(8,231
)
(10,157
)
Intangible amortization expense included in SG&A
(128
)
(158
)
30

(258
)
(395
)
137

Goodwill impairment
—

(37,540
)
37,540

—

(37,540
)
37,540

Restructuring activities and spin-off transaction costs
(936
)
(3,826
)
2,890

(7,015
)
(10,688
)
3,673

Research and development costs
(710
)
(1,287
)
577

(1,453
)
(2,429
)
976

Loss on asset disposals, net
(42
)
(1,384
)
1,342

(42
)
(1,384
)
1,342

Equity in income and impairment of investees
—

—

—

—

(11,757
)
11,757

Operating loss
$
(4,258
)
$
(137,351
)
$
133,093

$
(36,220
)
$
(243,779
)
$
207,559

(1) Intangible amortization is not allocated to the segments' gross profit, but depreciation is allocated to the segments' gross profit.

49





Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
$ Change
2019
2018
$ Change
Adjusted EBITDA
 
 
 
 
 
 
Babcock & Wilcox segment(1) 
$
19,032

$
9,897

$
9,135

$
27,996

$
14,074

$
13,922

Vølund & Other Renewable segment
(779
)
(78,603
)
77,824

(9,642
)
(140,357
)
130,715

SPIG segment
(142
)
(6,222
)
6,080

517

(13,532
)
14,049

Corporate(2)
(9,367
)
(6,194
)
(3,173
)
(14,351
)
(17,808
)
3,457

Research and development costs
(710
)
(1,287
)
577

(1,453
)
(2,429
)
976


8,034

(82,409
)
90,443

3,067

(160,052
)
163,119












 
Restructuring activities and spin-off transaction costs
(936
)
(3,826
)
2,890

(7,015
)
(10,688
)
3,673

Financial advisory services
(3,197
)
(5,142
)
1,945

(7,155
)
(8,231
)
1,076

Settlement cost to exit Vølund contract(3)
—

—

—

(6,575
)
—

(6,575
)
Advisory fees for settlement costs and liquidity planning
(1,581
)
—

(1,581
)
(4,658
)
—

(4,658
)
Goodwill impairment
—

(37,540
)
37,540

—

(37,540
)
37,540

Impairment of equity method investment in TBWES
—

—

—

—

(18,362
)
18,362

Gain on sale of equity method investment in BWBC
—

—

—

—

6,509

(6,509
)
Depreciation & amortization
(6,536
)
(6,921
)
385

(13,842
)
(13,902
)
60

Loss on asset disposal
(42
)
(1,513
)
1,471

(42
)
(1,513
)
1,471

Operating loss
(4,258
)
(137,351
)
133,093

(36,220
)
(243,779
)
207,559

Interest expense, net
(26,636
)
(11,770
)
(14,866
)
(37,211
)
(25,069
)
(12,142
)
Loss on debt extinguishment
(3,969
)
(49,241
)
45,272

(3,969
)
(49,241
)
45,272

Loss on sale of business
(3,601
)
—

(3,601
)
(3,601
)
—

(3,601
)
Net pension benefit before MTM
3,333

6,542

(3,209
)
6,761

13,539

(6,778
)
MTM (gain) loss from benefit plans
(862
)
544

(1,406
)
(1,260
)
544

(1,804
)
Foreign exchange
9,506

(20,198
)
29,704

(647
)
(17,741
)
17,094

Other – net
43

(131
)
174

463

266

197

Loss before income tax expense
(26,444
)
(211,605
)
185,161

(75,684
)
(321,481
)
245,797

Income tax expense (benefit)
1,891

(1,934
)
3,825

2,517

5,029

(2,512
)
Loss from continuing operations
(28,335
)
(209,671
)
181,336

(78,201
)
(326,510
)
248,309

Gain (loss) from discontinued operations, net of tax
694

(55,932
)
56,626

694

(59,428
)
60,122

Net loss
(27,641
)
(265,603
)
237,962

(77,507
)
(385,938
)
308,431

Net income (loss) attributable to noncontrolling interest
1

(165
)
166

102

(263
)
365

Net loss attributable to stockholders
$
(27,640
)
$
(265,768
)
$
238,128

$
(77,405
)
$
(386,201
)
$
308,796

(1) 
The Babcock & Wilcox segment adjusted EBITDA for the three and six months ended June 30, 2018 excludes $6.5 million and $13.5 million, respectively, of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, that were previously included in the segment results. Beginning in 2019, net pension benefits are no longer allocated to the segments, and prior periods have been adjusted to be presented on a comparable basis.
(2) 
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the SPIG segment have been included with other unallocated costs in Corporate, and total $2.9 million and $5.7 million in the three months and six months ended June 30, 2018, respectively.
(3) 
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement eliminates our obligations and our risk related to acting as the prime EPC should the project move forward.

50





Consolidated Results of Operations

Three Months Ended June 30, 2019 and 2018

Revenues decreased by $43.2 million to $248.1 million in the second quarter of 2019 as compared to $291.3 million in the second quarter of 2018. Revenue in the Babcock & Wilcox segment increased by $3.2 million primarily due to higher volume of large construction new build projects, including industrial projects, which were partly offset by a decrease in volume of parts and retrofits. Revenue in the Vølund & Other Renewable segment revenues decreased by $21.3 million primarily due to the sale of our Palm Beach Resources Recovery Corporation ("PBRRC") operations and maintenance contracts in the third quarter of 2018 and the level of activity and changes in estimates in the EPC loss contracts, as described in Note 4, which was partially offset by the startup of two operations and maintenance contracts in the U.K. that followed turnover of the EPC contracts to the customers. SPIG segment revenue declined $23.2 million due to lower volume of new build cooling systems services following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products and a lower volume of aftermarket cooling system services.

Gross profit increased by $85.4 million, to $44.3 million in the second quarter of 2019 as compared to $(41.1) million in the second quarter of 2018. The Babcock & Wilcox segment gross profit increased $7.8 million to $37.9 million in the second quarter of 2019 compared to $30.0 million in the second quarter of 2018 primarily due to higher construction volume and lower warranty costs. In the Vølund & Other Renewable segment, gross profit increased $74.4 million to $5.1 million recorded in the second quarter of 2019 compared to $(69.3) million in the second quarter of 2018, primarily due to a lower level of losses on the six European Vølund EPC loss contracts as described in Note 4. The SPIG segment gross profit increased $2.3 million to $2.4 million in the second quarter of 2019 compared to $0.1 million in the second quarter of 2018, which begins to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG's gross profit in the second quarter of 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts is a loss contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S., which continued through the second quarter of 2019.

Operating losses improved $133.1 million to $(4.3) million in the second quarter of 2019 from $(137.4) million in the second quarter of 2018, primarily due to the increase in gross profit described above, the absence of goodwill impairment charges and SG&A benefiting from restructuring and cost control initiatives implemented during 2018 and continuing through the second quarter of 2019. Restructuring expenses, advisory fees, intangible asset amortization expense and gains (losses) on dispositions of equity method investees, and impairments are discussed in further detail in the sections below. Additionally, the second quarter of 2018 included settlement and advisory costs as described above.

Six Months Ended June 30, 2019 and 2018

Revenues decreased by $64.5 million to $480.1 million in the first six months of 2019 as compared to $544.5 million in the first six months of 2018. Revenue in the Babcock & Wilcox segment increased by $32.6 million primarily due to higher volume of large construction new build projects, including inter-segment projects, and industrial projects, which were partly offset by a decrease in retrofit volume. Revenue in the Vølund & Other Renewable segment revenues decreased by $51.7 million primarily due to the sale of our Palm Beach Resources Recovery Corporation ("PBRRC") operations and maintenance contracts in the third quarter of 2018 and the lower level of activity and changes in estimates, including the effect of the settlements, on the EPC loss contracts as described above and in Note 4, which was partially offset by the startup of two operations and maintenance contracts in the U.K. SPIG segment revenue declined $31.0 million due to lower volume of new build cooling systems services following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products and a lower volume of aftermarket cooling system services.

Gross profit increased by $140.4 million, to $75.2 million in the first six months of 2019 as compared to $(65.2) million in the first six months of 2018. The Babcock & Wilcox segment gross profit increased $8.1 million to $69.0 million in the first six months of 2019 compared to $60.9 million in the first six months of 2018 primarily due to the increase in, and mix of, revenue above as well as lower warranty expense. In the Vølund & Other Renewable segment, gross profit increased $122.0 million to $2.2 million recorded in the first six months of 2019 compared to $(119.8) million in the first six months of 2018, primarily due to a lower level of losses on the six European Vølund EPC loss contracts as described in Note 4. The SPIG

51




segment gross profit increased $8.7 million to $6.1 million in the first six months of 2019 compared to a loss of $(2.7) million in the first six months of 2018, which begins to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG's gross profit (loss) in the first six months of 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts is a loss contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S., which continued through the first six months of 2019.

Operating losses improved $207.6 million to $(36.2) million in the first six months of 2019 from $(243.8) million in the first six months of 2018, primarily due to the increase in gross profit described above, SG&A benefiting from restructuring and cost control initiatives implemented during 2018 and continuing through the first six months of 2019 and the absence of impairments. Restructuring expenses, intangible asset amortization expense and gains (losses) on dispositions of equity method investees, financial advisory fees, settlement costs and impairments are discussed in further detail in the sections below.

Babcock & Wilcox Segment Results
 
Three months ended June 30,
Six months ended June 30,
(In thousands)
2019
2018
$ Change
2019
2018
$ Change
Revenues
$
200,964

$
197,752

$
3,212

$
389,522

$
356,878

$
32,644

Gross profit
$
37,853

$
30,013

$
7,840

$
68,959

$
60,876

$
8,083

Adjusted EBITDA
$
19,032

$
9,897

$
9,135

$
27,996

$
14,074

$
13,922

Gross profit %
18.8
%
15.2
%
 
17.7
%
17.1
%
 

Three Months Ended June 30, 2019 and 2018

Revenues in the Babcock & Wilcox segment increased 2%, or $3.2 million, to $201.0 million in the second quarter of 2019 compared to $197.8 million in the second quarter of 2018. The revenue increase is primarily attributable to a higher volume of large construction new build projects, including industrial projects, which were partly offset by a decrease in volume of parts and retrofits.

Gross profit in the Babcock & Wilcox increased $7.8 million to $37.9 million in the second quarter of 2019 compared to $30.0 million in the second quarter of 2018, primarily related to higher construction volume as described above and lower warranty expense. Warranty expense in the second quarter of 2018 included $5.3 million of specific provisions on certain contracts in the B&W segment for specific technical matters and customer requirements.

Adjusted EBITDA in the Babcock & Wilcox segment increased 92%, or $9.1 million, to $19.0 million in the second quarter of 2019 compared to $9.9 million in the second quarter of 2018, which is mainly attributable to the improvement in gross profit described above.

Six Months Ended June 30, 2019 and 2018

Revenues in the Babcock & Wilcox segment increased 9%, or $32.6 million, to $389.5 million in the six months ended June 30, 2019 compared to $356.9 million in the corresponding period in 2018. The revenue increase is attributable to a higher volume of large construction new build projects, including inter-segment projects, and industrial projects, which were partly offset by a decrease in retrofit volume.

Gross profit in the Babcock & Wilcox segment increased $8.1 million to $69.0 million in the six months ended June 30, 2019 compared to $60.9 million in the corresponding period in 2018, which reflects the increase in, and mix of, revenue above as well as lower warranty expense. Construction services generally carry a lower margin than aftermarket parts, and the first half of 2019 also includes more inter-segment construction services performed for the SPIG U.S. loss contract described in Note 4, which carries no margin because the contract is in a loss position. Warranty expense in the second quarter of 2018 included $5.3 million of specific provisions on certain contracts in the B&W segment for specific technical matters and customer requirements.


52




Adjusted EBITDA in the Babcock & Wilcox segment increased 99%, or $13.9 million, to $28.0 million in the six months ended June 30, 2019 compared to $14.1 million in the corresponding period in 2018, which is mainly attributable to the improvement in gross profit described above and results of cost savings and restructuring initiatives results partly offset by increases in overhead being absorbed by the segment that were previously absorbed by other segments.

Vølund & Other Renewable Segment Results
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
$ Change
2019
2018
$ Change
Revenues
$
33,695

$
55,002

$
(21,307
)
$
63,227

$
114,960

$
(51,733
)
Gross profit (loss)
$
5,057

$
(69,329
)
$
74,386

$
2,201

$
(119,778
)
$
121,979

Adjusted EBITDA
$
(779
)
$
(78,603
)
$
77,824

$
(9,642
)
$
(140,357
)
$
130,715

Gross profit %
15.0
%
(126.0
)%
 
3.5
%
(104.2
)%
 

Three Months Ended June 30, 2019 and 2018

Revenues in the Vølund & Other Renewable segment decreased 39%, or $21.3 million to $33.7 million in the second quarter of 2019 compared to $55.0 million in the second quarter of 2018. The reduction in revenue primarily relates to the September 17, 2018 divestiture of PBRRC, a subsidiary that held two operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, that had previously generated annual revenues of approximately $60 million. Revenue was also lower due to the level of activity and changes in estimates in the Engineer, Procure and Construct ("EPC") loss contracts, as described in Note 4, which was partially offset by the startup of two operations and maintenance contracts in the U.K. that followed turnover of the EPC contracts to the customers. Our revenue in 2019 was also affected by a previous change in strategy for the Vølund business. In 2017, we redefined our approach to bidding on and executing renewable energy contracts, under which we are focusing on engineering and supplying our core waste-to-energy and renewable energy technologies - steam generation, combustion grate, environmental equipment, material handling and cooling condensers - while partnering with other firms to execute the balance of plant and civil construction scope on contracts we pursue. We expect this lower, more focused scope to result in lower levels of revenue, but better execution on future work. Additionally, we previously made the decision to limit bidding on Vølund renewable energy contracts while we focused on progressing the EPC loss contracts, and that previous limit on bidding has resulted in lower revenue in 2019. Future year-over-year comparisons will also be affected by the sale of Loibl, a materials handling business in Germany, effective May 31, 2019 as described in Note 25. Prior to the divestiture, Loibl was part of the Vølund & Other Renewable segment and had revenues of approximately $30 million for the year ended December 31, 2018.

Gross profit in the Vølund & Other Renewable segment increased $74.4 million to $5.1 million in the second quarter of 2019 compared to $(69.3) million in the second quarter of 2018. In the second quarter of 2018, we recorded $57.3 million in net losses including warranty resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. Only $3.2 million of equivalent losses were recorded in the second quarter of 2019 inclusive of warranty, which were partially offset by $5.9 million for additional insurance recovery settlements that were collected and are expected to be collected in the third quarter 2019. Beyond the effect of the loss contracts, the second quarter 2019 gross profit included lower levels of direct overhead support and warranty expense, offset by the absence of gross profit from PBRRC as a result of its September 2018 sale as described above. Changes in estimated costs to complete the six European Vølund EPC loss contracts includes changes in estimated warranty costs, which was a reduction of $3.9 million in the second quarter of 2019 related to developments in the quarter stemming from the March 29, 2019 settlement agreement compared to a $15.1 million increase in the second quarter of 2018 based on experience from the startup and commissioning activities in that period.

Adjusted EBITDA in the Vølund & Other Renewable segment improved $77.8 million to $(0.8) million in the second quarter of 2019 compared to $(78.6) million in the second quarter of 2018. The improvement was primarily due to gross profit, as described above. Additionally, SG&A was lower, reflecting the benefits of restructuring, lower indirect support cost of the EPC loss contracts, lower proposal costs and active reductions in discretionary spend.

Additional information about the changes in the estimated revenue and costs to complete these European Vølund EPC loss contracts, the March 29, 2019 settlement of the second and fifth loss contracts, changes in the warranty accruals and the insurance receivable is included in Note 4.


53




Six Months Ended June 30, 2019 and 2018

Revenues in the Vølund & Other Renewable segment decreased 45%, or $51.7 million to $63.2 million in the six months ended June 30, 2019 compared to $115.0 million in the corresponding period in 2018. The reduction primarily relates to the September 17, 2018 divestiture of PBRRC, a subsidiary that held two operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, that had previously generated annual revenues of approximately $60 million. Revenue was also lower due to the lower level of activity and changes in estimates, including the effect of the settlements, on the EPC loss contracts as described above and in Note 4, which was partially offset by the startup of two operations and maintenance contracts in the U.K. that followed turnover of the EPC contracts to the customers. Our revenue in 2019 was also affected by a previous change in strategy for the Vølund business and a previous decision to limit bidding on Vølund renewable energy contracts while we focused on progressing the EPC loss contracts, both of which are described above. Future year-over-year comparisons will also be affected by the sale of Loibl, a materials handling business in Germany, effective May 31, 2019 as described in Note 25. Loibl had revenue of approximately $30 million in the year ended December 31, 2018.

Gross profit in the Vølund & Other Renewable segment increased $122.0 million to $2.2 million in the six months ended June 30, 2019 compared to $(119.8) million in the corresponding period in 2018. In the six months ended June 30, 2019 and June 30, 2018, we recorded $7.4 million and $110.0 million in net losses including warranty, respectively, resulting from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts, which were partially offset by $5.9 million for additional insurance recovery settlements that were collected and are expected to be collected in the third quarter 2019. Beyond the effect of the loss contracts, gross profit for the six months ended June 30, 2019 included lower levels of direct overhead support and warranty expense, offset by the absence of gross profit from PBRRC as a result of its September 2018 sale as described above. Changes in estimated costs to complete the six European Vølund EPC loss contracts includes changes in estimated warranty costs, which was a reduction of $3.9 million in the second quarter of 2019 related to developments in the quarter stemming from the March 29, 2019 settlement agreement compared to a $15.1 million increase in the second quarter of 2018 based on experience from the startup and commissioning activities in that period.

Adjusted EBITDA in the Vølund & Other Renewable segment improved $130.7 million to $(9.6) million in the six months ended June 30, 2019 compared to $(140.4) million in the corresponding period of 2018. The improvement was primarily due to the gross profit variance, as described above. Additionally, SG&A was lower, reflecting the benefits of restructuring, lower indirect support cost of the EPC loss contracts, lower proposal costs and active reductions in discretionary spend.

Additional information about the changes in the estimated revenue and costs to complete these European Vølund EPC loss contracts, the March 29, 2019 settlement of the second and fifth loss contracts, changes in the warranty accruals and the insurance receivable is included in Note 4.

SPIG Segment Results
 
Three months ended June 30,
Six months ended June 30,
(In thousands)
2019
2018
$ Change
2019
2018
$ Change
Revenues
$
22,834

$
46,015

$
(23,181
)
$
51,736

$
82,759

$
(31,023
)
Gross profit (loss)
$
2,388

$
79

$
2,309

$
6,064

$
(2,672
)
$
8,736

Adjusted EBITDA
$
(142
)
$
(6,222
)
$
6,080

$
517

$
(13,532
)
$
14,049

Gross profit %
10.5
%
0.2
%
 
11.7
%
(3.2
)%
 

Three Months Ended June 30, 2019 and 2018

Revenues in the SPIG segment decreased 50%, or $23.2 million, to $22.8 million in the second quarter of 2019 from $46.0 million in the second quarter of 2018. The decrease is primarily due to lower volume of new build cooling systems services following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products and a lower volume of aftermarket cooling system services.

Gross profit in the SPIG segment increased $2.3 million, to $2.4 million in the second quarter of 2019, compared to $0.1 million in the second quarter of 2018. The improvement begins to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG gross profit (loss) in the second quarter of 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold

54




under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts is a loss contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S., which is expected to be compete in the third quarter of 2019.

Adjusted EBITDA in the SPIG segment improved $6.1 million to $(0.1) million in the second quarter of 2019 compared to $(6.2) million in the second quarter of 2018, driven by the improvement to gross profit and the benefits of cost savings and restructuring initiatives.

Six Months Ended June 30, 2019 and 2018

Revenues in the SPIG segment decreased 37%, or $31.0 million, to $51.7 million in the six months ended June 30, 2019 from $82.8 million in the corresponding period in 2018. The decrease is primarily due to lower volume of new build cooling systems services following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products and a lower volume of aftermarket cooling system services.

Gross profit in the SPIG segment increased $8.7 million, to $6.1 million in the six months ended June 30, 2019, compared to $(2.7) million in the corresponding period in 2018. The improvement begins to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG gross profit (loss) in the six months ended June 30, 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts is a loss contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the U.S., which is expected to be compete in the third quarter of 2019.

Adjusted EBITDA in the SPIG segment improved $14.0 million to $0.5 million of adjusted EBITDA income in the six months ended June 30, 2019 compared to $(13.5) million in the corresponding period in 2018, driven by the improvement to gross profit and the benefits of cost savings and restructuring initiatives.

Bookings and Backlog

Bookings and backlog are our measure of remaining performance obligations under our sales contracts. It is possible that our methodology for determining bookings and backlog may not be comparable to methods used by other companies.

We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customers to payment for work performed. Backlog may not be indicative of future operating results, and contracts in our backlog may be canceled, modified or otherwise altered by customers. Backlog can vary significantly from period to period, particularly when large new build projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. Additionally, because we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.


55




Bookings represent changes to the backlog. Bookings include additions from booking new business, subtractions from customer cancellations or modifications, changes in estimates of liquidated damages that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods, and that shorter-term changes in bookings may not necessarily indicate a material trend.
 
Three months ended June 30,
Six months ended June 30,
(In millions)
2019
2018
2019
2018
Babcock & Wilcox
$
140

$
132

$
327

$
403

Vølund & Other Renewable(1)(2)
(78
)
(23
)
(59
)
23

SPIG
18

18

30

45

Other/eliminations
(13
)
(1
)
(15
)
(2
)
Bookings
$
67

$
126

$
283

$
469

(1) 
Vølund & Other Renewable bookings includes the revaluation of backlog denominated in currency other than U.S. dollars. The foreign exchange impact on Vølund & Other Renewable bookings in the three months ended June 30, 2019 and 2018 was $(4.0) million and $(30.3) million, respectively, and the foreign exchange impact on Vølund & Other Renewable bookings in the six months ended June 30, 2019 and 2018 was $(0.5) million and $(12.3) million, respectively.
(2) In the three and six months ended June 30, 2019, Vølund & Other Renewable includes debookings of $19 million related to the sale of Loibl and $72 million related to a 15-year operations and maintenance contract previously expected to follow completion of the fifth European Vølund EPC loss contract, which was cancelled following the settlement agreement described in Note 4 .
 
Six months ended June 30,
(In approximate millions)
2019
2018
Babcock & Wilcox
$
323

$
500

Vølund & Other Renewable(1)
205

916

SPIG
65

137

Other/eliminations
(8
)
(35
)
Backlog
$
585

$
1,518

(1) 
Vølund & Other Renewable backlog at June 30, 2019, includes $169 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend.

Of the backlog at June 30, 2019, we expect to recognize revenues as follows:
(In approximate millions)
2019
2020
Thereafter
Total
Babcock & Wilcox
$
173

$
82

$
68

$
323

Vølund & Other Renewable
28

22

155

205

SPIG
21

14

30

65

Other/eliminations
(2
)
—

(6
)
(8
)
Expected revenue from backlog
$
220

$
118

$
247

$
585


Corporate

Corporate costs include SG&A expenses that are not allocated to the reportable segments. These costs include certain executive, compliance, strategic, reporting and legal expenses associated with governance of the total organization and being an SEC registrant. Corporate costs increased $3.2 million to $9.4 million in the second quarter of 2019 as compared to $6.2 million in the second quarter of 2018, primarily due to incentive compensation, partly offset by the benefits of restructuring and discretionary spend reductions. In the second quarter of 2018, incentive compensation accruals were reduced based on the company's performance, and in the second quarter of 2019 additional incentive compensation was awarded related to achieving the EPC contract settlements and financing arrangements.

Corporate costs decreased $3.5 million to $14.4 million in the six months ended June 30, 2019 as compared to $17.8 million in the six months ended June 30, 2018, primarily due to the benefits of restructuring, discretionary spend reductions, partly offset by incentive compensation awards in the second quarter of 2019.


56




Allocations are excluded from discontinued operations, and accordingly, $2.9 million and $5.7 million of indirect costs that were previously absorbed by the MEGTEC and Universal businesses were included as other unallocated costs in Corporate for the three and six months ended June 30, 2018, respectively.

Advisory Fees and Settlement Costs

Advisory fees and settlement costs decreased by $0.4 million to $4.8 million in the second quarter of 2019 as compared to $5.1 million in the second quarter of 2018, primarily due to a decrease in financial advisory fees, partly offset by an increase in legal fees related to pursuit of insurance recoveries.

Advisory fees and settlement costs increased by $10.2 million to $18.4 million in the six months ended June 30, 2019 as compared to $8.2 million in the six months ended June 30, 2018, primarily due to settlement cost to exit a certain Vølund contract as described in Note 4, an increase in legal fees related to liquidity planning and pursuit of insurance recoveries, partly offset by a decrease in financial advisory fees.

Research and Development

Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations. Research and development costs unrelated to specific contracts are expensed as incurred. Research and development expenses totaled $0.7 million and $1.3 million for the three months ended June 30, 2019 and 2018, respectively. Research and development expenses totaled $1.5 million and $2.4 million for the six months ended June 30, 2019 and 2018, respectively. The reductions for the three and six months ended June 30, 2019 resulted primarily from restructuring and cost-control initiatives.
 
Restructuring

In 2018, we began to implement a series of cost restructuring actions, primarily in our U.S., European, Canadian and Asian operations, and corporate functions. These actions were intended to appropriately size our operations and support functions in response to the continuing decline in certain global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale, the level of activity in our Vølund business and our liquidity needs. Severance actions across our business units, including executive severances, resulted in $0.9 million and $3.8 million of expense in the three months ended June 30, 2019 and 2018, respectively. Severance actions across our business units, including executive severances, resulted in $7.0 million and $10.7 million of expense in the six months ended June 30, 2019 and 2018, respectively. Severance expense is recognized over the remaining service periods of affected employees, and as of June 30, 2019, $0.7 million of total severance expense is remaining to be recognized based on actions taken through that date.

Our restructuring actions and other additional cost reductions since the second quarter of 2018 are targeting to save approximately $100 million annually once fully implemented.

Goodwill Impairment

Goodwill and other intangible assets are required to be tested for impairment annually or earlier if there are impairment indicators. Interim impairment testing as of June 30, 2018 was performed at SPIG due to lower bookings in the second quarter of 2018 than previously forecasted, which resulted in a reduction in the forecast for the reporting unit. As a result of the impairment test, we recognized a $37.5 million impairment of goodwill in the SPIG reporting unit, after which it did no have any remaining goodwill. Since June 30, 2018, all remaining goodwill is related to the Babcock & Wilcox segment as described in Note 7.

Equity in Income (Loss) of Investees

At June 30, 2019, we do not have any remaining investments in equity method investees. During the first quarter of 2018, we sold our interest in BWBC to our joint venture partner in China for approximately $21.1 million, resulting in a gain of approximately $6.5 million, which was classified in equity income of investees in the Condensed Consolidated Statement of Operations. Proceeds from this sale, net of $1.3 million of withholding tax, were $19.8 million. Our former equity method investment in BWBC had a manufacturing facility that designed, manufactured, produced and sold various power plant and industrial boilers, primarily in China.

57





In July 2018, we completed the sale of our investment in TBWES together with the settlement of related contractual claims and received $15.0 million in cash, of which $7.7 million related to our investment in TBWES and $7.3 million of proceeds were used to pay outstanding claims. In July 2018, the AOCI related to cumulative currency translation loss from our investment in TBWES of $2.6 million was also recognized as a loss and is included in foreign exchange in our Condensed Consolidated Statement of Operations. TBWES had a manufacturing facility that produced boiler parts and equipment intended primarily for new build coal boiler contracts in India. During the first quarter of 2018, based on a preliminary agreement to sell our investment in TBWES, we recognized an additional $18.4 million other-than-temporary-impairment. The impairment charge was based on the difference in the carrying value of our investment in TBWES and the preliminary sale price. These other-than-temporary-impairment losses were classified in equity income of investees in the Condensed Consolidated Statements of Operations.
 
Depreciation and Intangible Asset Amortization

Depreciation expense was $5.4 million and $4.9 million in the three months ended June 30, 2019 and 2018, respectively. Depreciation expense was $11.5 million and $9.8 million in the six months ended June 30, 2019 and 2018, respectively.

We recorded intangible asset amortization expense of $1.1 million and $2.0 million in the three months ended June 30, 2019 and 2018, respectively, and $2.3 million and $4.1 million in the six months ended June 30, 2019 and 2018, respectively.

In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. At the same time, we announced that we would consolidate most of our Barberton and Copley, Ohio operations into new, leased office space in Akron, Ohio. The move to the new, leased office space is expected to occur during the fourth quarter of 2019. We do not expect to incur significant relocation costs; however, we expect $7.9 million of accelerated depreciation to be recognized through mid-2019, of which $2.0 million and $4.0 million was recognized during the three and six months ended June 30, 2019, respectively, and $7.3 million has been recognized cumulatively, since the decision to relocate in the third quarter of 2018.

Pension and Other Postretirement Benefit Plans

We recognize pension benefit from our defined benefit and other postretirement benefit plans, which are based on actuarial calculations. We recognize benefit primarily because our expected return on assets is greater than our service costs. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits, excluding MTM adjustments were $3.3 million and $6.5 million in the three months ended June 30, 2019 and 2018, respectively, and $6.8 million and $13.5 million in the six months ended June 30, 2019 and 2018, respectively.

Our pension costs also include MTM adjustments from time to time, as described further in Note 12. Interim MTM charges are a result of curtailments or settlements. Any MTM charge or gain should not be considered to be representative of future MTM adjustments as such events are not currently predicted and are in each case subject to market conditions and actuarial assumptions as of the date of the even giving rise to the MTM adjustment.

Lump sum payments from our Canadian Plans resulted plan settlements during the first and second quarters of 2019. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities that were losses of $0.9 million and $1.3 million in the three and six months ended June 30, 2019, respectively.

Refer to Note 12 for further information regarding our pension and other postretirement plans. Other than service cost of $0.2 million and $0.2 million in the three months ended June 30, 2019 and 2018, respectively, and $0.3 million and $0.4 million in the six months ended June 30, 2019 and 2018, respectively, which are related to the small number of hourly participants still accruing benefits within the Babcock & Wilcox segment, pension benefit and MTM adjustments are excluded from the results of our segments.

Foreign Exchange

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.

58





Foreign exchange was a gain of $9.5 million and a loss of $0.6 million for the three and six months ended June 30, 2019, respectively, and was a loss of $20.2 million and $17.7 million for the three and six months ended June 30, 2018, respectively. Foreign exchange gains and losses are primarily related to unhedged intercompany loans denominated in European currencies to fund foreign operations. Foreign exchange losses in 2019 were driven primarily by a strengthening U.S. dollar compared to the underlying European currencies.

Income Taxes
 
Three months ended June 30,
Six months ended June 30,
(In thousands, except for percentages)
2019
2018
$ Change
2019
2018
$ Change
Loss before income taxes
(26,444
)
(211,605
)
$
185,161

$
(75,684
)
(321,481
)
$
245,797

Income tax expense (benefit)
1,891

(1,934
)
$
3,825

$
2,517

5,029

$
(2,512
)
Effective tax rate
(7.2
)%
0.9
%
 
(3.3
)%
(1.6
)%
 

Our income tax expense in the second quarter of 2019 reflects a full valuation allowance against our net deferred tax assets. Deferred tax assets are evaluated each period to determine whether it is more likely than not that those deferred tax assets will be realized in the future, and valuation allowances are recorded when the ability to utilize those deferred tax assets to reduce taxable income in the foreseeable future is less than more likely than not. Valuation allowances do not limit our ability to use deferred tax assets in the future. Valuation allowances may be reversed in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework of ASC 740, Income Taxes.

Our effective tax rate for the second quarter of 2019 is not reflective of the U.S. statutory rate primarily due to a full valuation allowance against net deferred tax assets. In jurisdictions where we have available net operating loss carryforwards ("NOLs"), such as the U.S., Denmark and Italy, the existence of a full valuation allowance against deferred tax assets results in income tax benefit or expense relating primarily to discrete items. In other profitable jurisdictions, however, we may record income tax expense, even though we have established a full valuation allowance against our net deferred tax assets. Our income tax expense (benefit) also reflects changes in the jurisdictional mix of income and losses.

In the second quarter of 2018, our effective tax rate was also affected by valuation allowances related to losses incurred in certain jurisdictions. Additionally, we operated in numerous countries that have statutory tax rates that differ from that of the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 19% and approximately 30%. In addition to statutory rate differences, the jurisdictional mix of our income (loss) before tax can be significantly affected by mark to market adjustments related to our pension and postretirement plans, which have been primarily in the United States, and the impact of discrete items and other nondeductible expenses.

Loss before provision for income taxes generated in the United States and foreign locations for the three and six months ended June 30, 2019 and 2018 is presented in the table below.
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
United States
$
(25,281
)
$
(66,146
)
$
(37,505
)
$
(91,170
)
Other than the United States
(1,163
)
(145,459
)
(38,179
)
(230,311
)
Loss before provision for (benefit from) income taxes
$
(26,444
)
$
(211,605
)
$
(75,684
)
$
(321,481
)

See Note 20 for explanation of differences between our effective income tax rate and our statutory rate. Note 20 also describes the impact of an "ownership change" under Section 382 of the Internal Revenue Code ("IRC"). The Equitization Transactions described in Note 18 have resulted in an "ownership change" under IRC Section 382.


59




Liquidity and Capital Resources

Liquidity

To address our liquidity needs and the going concern uncertainty, we have taken the following actions in 2019 as follows:
•
completed equitization transactions on July 23, 2019 as described in Note 18 and Note 17, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise $50.0 million that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans;
•
executed a one-for-ten reverse stock split of our issued and outstanding common stock, which became effective on July 24, 2019;
•
completed the sale of a non-core materials handling business in Germany, Loibl GmbH ("Loibl") effective May 31, 2019 for €10.0 million (approximately $11.4 million), subject to adjustment, resulting in net receipt of $7.4 million;
•
received $150.0 million in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in Note 14, from B. Riley FBR, Inc., a related party, on April 5, 2019;
•
received $10.0 million in net proceeds from Tranche A-2 of the Last Out Term Loans, described in Note 14, from B. Riley Financial, Inc. (together with its affiliates, including B. Riley FBR, Inc., "B. Riley"), a related party, on March 20, 2019;
•
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in Note 4, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans;
•
entered into an additional settlement as described in Note 4 in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started, whereby our obligations and our risk from acting as the prime EPC should the project move forward was eliminated;
•
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in Note 13 and Note 14, the most recent of which were Amendments No. 16 and No. 17, dated April 5, 2019 and August 7, 2019, respectively, which provided Tranche A-3 of the Last Out Term Loans described above and in Note 14, reset the financial and other covenants, adjusted the interest rate of the Last Out Term Loans, reset the maturity date of the Last Out Term Loans to December 31, 2020, increased borrowing capacity under the U.S. Revolving Credit Facility by reducing the minimum liquidity requirement, allowed for the issuance of a limited amount of new letters of credit with respect to any future Vølund project, permitted other letters of credit to expire up to one year after the maturity of the U.S. Revolving Credit Facility, clarifies (Amendment No. 17) the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019; and
•
filed and plan to file for waiver of required minimum contributions to the U.S. Pension Plan as described in Note 12, that if granted, would reduce cash funding requirements in 2019 by approximately $15 million and a similar or greater amount in 2020 and would increase contributions over the following five years. The waiver request for the first plan year remains under review by the IRS and the waiver request for the second plan year is expected to be filed later in 2019 or early 2020.

Management believes it has taken and is continuing to take prudent actions to address the substantial doubt regarding our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face because some matters may not fully be in our control. Amendment No. 16 to the Amended Credit Facility also created a new event of default for failure to terminate the existing U.S. Revolving Credit Facility on or prior to March 15, 2020, which is within twelve months of the date of this filing. Our ability to comply with the financial and other covenants of the Amended Credit Facility through that date are dependent upon achieving our forecasted financial results. While management believes it will be able to obtain additional financing to replace our U.S. Revolving Credit facility, the ability to do so will depend on credit markets and other matters that are outside of our control.

In addition to the discussions regarding additional financing described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available.


60




On November 27, 2018, we received written notification (the "NYSE Notice"), from the New York Stock Exchange (the "NYSE"), that we were not in compliance with an NYSE continued listing standard in Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock fell below $1.00 over a period of 30 consecutive trading days. We can regain compliance with the minimum per share average closing price standard at any time during the six-month cure period if, on the last trading day of any calendar month during the cure period, we have (i) a closing share price of at least $1.00 and (ii) an average closing price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. We completed a reverse stock split effective as of July 24, 2019 to regain compliance, but there is no guarantee that this reverse stock split will enable us to cure this deficiency. Our common stock could also be delisted if we fail to satisfy any other continued listing standards. For example, based on our current shareholders' equity, our common stock may be subject to delisting if our average market capitalization over a consecutive 30-trading-day period is less than $50.0 million, subject to our ability to regain compliance with this listing standard during an applicable cure period.

On July 11, 2019, the Company's board of directors approved a reverse stock split of one-for-ten on the Company's issued and outstanding common stock which became effective on July 24, 2019. The one-for-ten reverse stock split automatically converted every ten shares of the Company's outstanding and treasury common stock prior to the effectiveness of the reverse stock split into one share of common stock. No fractional shares were issued in the reverse stock split. Instead, stockholders who would otherwise have held fractional shares received cash payments (without interest) in respect of such fractional shares. The reverse stock split did not impact any stockholder's percentage ownership of the Company, subject to the treatment of fractional shares. The reverse stock split was undertaken to increase the market price per share of the Company's common stock to allow the Company to regain compliance with the NYSE's continued listing standards relating to minimum price per share pending final approval by the NYSE.

Cash as of June 30, 2019 and Cash Flows for the six months ended June 30, 2019 and 2018

At June 30, 2019, our unrestricted cash and cash equivalents totaled $35.2 million and we had total debt of $367.5 million. Our foreign business locations held $30.9 million of our total unrestricted cash and cash equivalents at June 30, 2019. Our U.S. Revolving Credit Facility allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that U.S. cash on hand is minimized to reduce borrowing costs. In general, our foreign cash balances are not available to fund our U.S. operations unless the funds are repatriated or used to repay intercompany loans made from the U.S. to foreign entities, which could expose us to taxes we presently have not made a provision for in our results of operations. We presently have no plans to repatriate these funds to the U.S. At June 30, 2019, we had approximately $18.6 million available for borrowings under the U.S. Revolving Credit Facility.

Cash used in operations was $193.0 million in the six months ended June 30, 2019, which was primarily due to funding settlements related to European Vølund EPC contracts as described in Note 4, progress against accrued losses on the six European Vølund EPC loss contracts and working capital build within the Babcock & Wilcox segment related to the timing and mix of work. In the six months ended June 30, 2018, cash used in operations was $150.6 million and primarily related to funding progress on the six European Vølund EPC loss contracts in the Vølund & Other Renewable segment, corporate overhead (inclusive of interest, pension and other postretirement benefits, financial advisory services, restructuring and spin costs, and research and development) and working capital build within the Babcock & Wilcox segment related to the timing and mix of work.

Cash flows from investing activities provided net cash of $5.2 million in the six months ended June 30, 2019, primarily from proceeds received from the sale of Loibl for $7.4 million. In the six months ended June 30, 2018, net cash provided by investing activities was $24.2 million, primarily related to the sale of our equity method investment in BWBC for $21.1 million and the sale of a small emissions monitoring business for $5.1 million which were offset by $4.4 million of capital expenditures.

Cash flows from financing activities provided net cash of $175.1 million in the six months ended June 30, 2019, primarily related to $151.4 million of proceeds from the Last Out Term Loans and $39.5 million of net borrowings from the U.S. Revolving Credit Facility, partly offset by $14.4 million of financing fees. Net cash provided by financing activities in the six months ended June 30, 2018 was $122.1 million and included gross proceeds received from the rights offering of $248.4 million, which $212.6 million was used to repay the Second Lien Term Loan and the remainder was also used to fund operations. Cost associated with the financing activity in the six months ended June 30, 2018 totaled $10.0 million.


61




U.S. Revolving Credit Facility

On May 11, 2015, we entered into "the Amended Credit Agreement" with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") which governs the U.S. Revolving Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments ("the Amendments") to the Amended Credit Agreement, including those to avoid default. As of June 30, 2019, we were in compliance with the terms of the Amended Credit Agreement inclusive of Amendments No. 16 and No. 17. On April 5, 2019, we entered into Amendment No. 16 to the Amended Credit Agreement. Amendment No. 16 provides (i) $150.0 million in additional commitments from B. Riley FBR, Inc., under Tranche A-3 of last out term loans described in Note 14 and (ii) an incremental uncommitted facility of up to $15.0 million, to be provided by B. Riley or an assignee. Amendment No. 16 provides (i) $150.0 million in additional commitments from B. Riley FBR, Inc., under Tranche A-3 of last out term loans described in Note 14 and (ii) an incremental uncommitted facility of up to $15.0 million, to be provided by B. Riley or an assignee. On August 7, 2019, we entered into Amendment No. 17 to the Amended Credit Agreement, which clarifies the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts and resets the loss basket for certain Vølund contracts to $15.0 million commencing with the quarter ending March 31, 2019.

Amendment No. 16 to the Amended Credit Agreement also created a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, which effectively accelerated the maturity date of the U.S. Revolving Credit Facility from June 30, 2020. The U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to $347.0 million (reduced to $340.0 million in July 2019 as a result of the Loibl divestiture described in Note 25), as amended and adjusted for completed asset sales. The proceeds from loans under the U.S. Revolving Credit Facility are available for working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the amendment described below.

The Amended Credit Agreement and our cash management agreements with our lenders and their affiliates continue to be (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The U.S. Revolving Credit Facility 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, with the exception to the prepayment of certain Last Out Term Loans pursuant to the Equitization Transactions described in Note 18; such Last Out Term Loan prepayments are further limited by an aggregate principal amount of $86 million plus interest. The U.S. Revolving Credit Facility requires certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions. Such prepayments may require us to reduce the commitments under the U.S. Revolving Credit Facility by a corresponding amount of such prepayments.

After giving effect to the Amendments through June 30, 2019, revolving loans outstanding under the U.S. Revolving Credit Facility bear interest at our option at either (1) the LIBOR rate plus 6.0% per annum during 2019 and 7.0% per annum during 2020, or (2) the Base Rate plus 5.0% per annum during 2019, and 6.0% per annum during 2020. The Base Rate is 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. The components of our interest expense are detailed in Note 19. A commitment fee of 1.0% per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of $1.5 million was paid on the first business day of 2019, and a pro-rated amount is payable on the first business day of 2020. A deferred fee reduction from 2.5% to 1.5% became effective October 10, 2018, due to achieving certain asset sales. A letter of credit fee of 2.5% per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.5% per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Letter of credit fees are payable on the tenth business day after the last business day of each fiscal quarter.

In connection with Amendment No. 16, a contingent consent fee of $13.9 million (4.0% of total availability) is payable on December 15, 2019, but will be waived if certain actions are undertaken to refinance the facility by that date. We recorded the contingent consent fee as part of deferred financing fees in other current assets in the Condensed Consolidated Balance Sheets because it has been earned but may be waived, and it is being amortized to interest expense. See further discussion in Note 19. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of 1.0% of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to

62




an incremental 1.0% per month after December 15, 2019.  No expense has been recognized for the deferred ticking fee because the company believes it is not probable of being earned by the lenders.

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. These include a maximum permitted senior debt leverage ratio and a minimum consolidated interest coverage ratio, each as defined in the Amended Credit Agreement. Compliance with these ratios was waived with respect to the quarter ended December 31, 2018 and new ratios were established in Amendment No. 16 commencing with the quarter ended March 31, 2019. Amendment No. 16 also, among other items, (1) modifies the definition of EBITDA in the Credit Agreement to, among other things, include addbacks related to losses in connection with the Vølund projects, fees and expenses related to the Amendment and prior waivers to the Credit Agreement and fees associated with Vølund project related settlement agreements, (2) reduces to $30 million the minimum liquidity we are required to maintain at the time of any credit extension request and at the last business day of any calendar month, (3) allows for the issuance of up to $20.0 million of new letters of credit with respect to any future Vølund project, (4) changes the consolidated interest coverage and senior leverage coverage covenant ratios, (5) decreases the relief period borrowing sublimit, (6) changes or removes certain contract completion milestones that we had been required to meet in connection with one renewable energy project, (7) permits letters of credit to expire one year after the maturity of the revolving credit facility, (8) creates a new event of default for failure to terminate the existing revolving credit facility on or prior to March 15, 2020, (9) establishes a deferred ticking fee of 1.0% if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental 1.0% per month after December 15, 2019 and (10) provides for a contingent consent fee of 4.0% if certain actions are not undertaken to refinance the facility by December 15, 2019. Amendment No. 17, among other items, (1) clarifies from Amendment No. 16 the definition of the amounts that can be used in calculating the loss basket for certain Vølund contracts, and (2) resets the loss basket for certain Vølund contracts to $15.0 million to align with the clarification commencing with the quarter ending March 31, 2019.

Effective beginning April 5, 2019 with Amendment No. 16, the remaining maximum permitted senior debt leverage ratios, as defined in the Amended Credit Agreement, are as follows:

•9.25:1.00 for the quarter ending June 30, 2019
•6.75:1.00 for the quarter ending September 30, 2019
•6.00:1.00 for the quarter ending December 31, 2019
•3.50:1.00 for the quarter ending March 31, 2020
•3.25:1.00 for the quarter ending June 30, 2020
  
Effective beginning April 5, 2019 with Amendment No. 16, the remaining minimum consolidated interest coverage ratios, as defined in the Amended Credit Agreement, are as follows:

•0.90:1.00 for the quarter ending June 30, 2019
•1.10:1.00 for the quarter ending September 30, 2019
•1.10:1.00 for the quarter ending December 31, 2019
•1.50:1.00 for the quarter ending March 31, 2020
•1.75:1.00 for the quarter ending June 30, 2020

At June 30, 2019, borrowings under the U.S. Revolving Credit Facility consisted of $184.4 million at a weighted average interest rate of 9.13%. Usage under the U.S. Revolving Credit Facility consisted of $184.4 million of borrowings, $29.2 million of financial letters of credit and $114.8 million of performance letters of credit. At June 30, 2019, we had approximately $18.6 million available for borrowings or to meet letter of credit requirements primarily based on our overall facility size and our borrowing sublimit. The closing of the Loibl sale in June 2019 increased our borrowing capacity by $8.5 million due to the release of a performance letter of credit, effective June 24, 2019. In July 2019, the U.S. Revolving Credit Facility was reduced by $7.0 million due to the sale of Loibl, in accordance with the terms of the Amended Credit Agreement.

Foreign Revolving Credit Facilities

Outside of the United States, we had revolving credit facilities in Turkey that were used to provide working capital to local operations. At December 31, 2018, we had aggregate borrowings under these facilities of $0.6 million whose weighted average interest rate was 40.0%. In 2018, our banking counterparties in Turkey began requiring the conversion of these

63




revolving credit facilities to be denominated in Turkish liras instead of euros, resulting in correspondingly higher market interest rates. As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.

Last Out Term Loans

Last Out Term Loans are incurred under our Amended Credit Agreement and are pari passu with the U.S. Revolving Credit Facility except for certain payment subordination provisions. The Last Out Term Loans are subject to the same representations and warranties, covenants and events of default under the Amended Credit Agreement. In connection with Amendment No. 16, the maturity date for all Last Out Term Loans was extended to December 31, 2020. As of June 30, 2019 and December 31, 2018, the Last Out Term Loans' net carrying values are presented as a current liability in our Condensed Consolidated Balance Sheets due to the uncertainty of our ability to refinance our U.S. Revolving Credit Facility as required by the Amended Credit Agreement (as described above).

As of June 30, 2019, after giving effect to Amendment No. 16, all outstanding Last Out Term Loans bear interest at a fixed rate per annum of 15.5% per annum. of which 7.5% is payable in cash and 8% is payable in kind. Upon completion of the 2019 Rights Offering (as defined below) on July 23, 2019, the interest rate on all outstanding Last Out Term Loans under the Amended Credit Agreement became a fixed rate per annum of 12% payable in cash. The total effective interest rate of Tranche A-1 was 15.98% and 25.38% on June 30, 2019 and December 31, 2018, respectively. Interest expense associated with the Last Out Term Loans is detailed in Note 19. Amendment No. 16 also permitted prepayment of up to $86.0 million of the Last Out Term Loans as contemplated under the Equitization Transactions described in Note 18.

Tranche A-1

We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley FBR, Inc., a related party, in three draws in September and October 2018. In November 2018, Tranche A-1 was assigned to Vintage Capital Management, LLC ("Vintage"), also a related party, who held the full amount of Tranche A-1 at June 30, 2019. The original face principal amount of Tranche A-1 is $30.0 million, which excludes a $2.0 million up-front fee that was added to the principal balance on the first funding date, transaction expenses, paid-in-kind interest, and original issue discounts of 10% for each draw under Tranche A-1.

On April 5, 2019, Amendment No. 16 and the Letter Agreement (defined in Note 18) modified Tranche A-1 by adding a substantive conversion option that required the conversion of the Tranche A-1 to common stock at $0.30 per share in connection with the Equitization Transactions described in Note 18, which was conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. Under U.S. GAAP, a debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The carrying value of the Tranche A-1 was $33.3 million on April 5, 2019 before the modification. The initial fair value of the new debt was estimated to be its initial principal value of $37.3 million. We recognized a loss on debt extinguishment of $4.0 million in the quarter ended June 30, 2019, primarily representing the unamortized value of the original issuance discount and fees on the extinguished debt.

As of June 30, 2019, Tranche A-1 was payable in full on December 31, 2020, the maturity date. Tranche A-1 may be prepaid, subject to the subordination provisions, but not re-borrowed. As described in Note 18, Tranche A-1 was exchanged for shares on July 23, 2019, after which no remaining amounts were outstanding.

Tranche A-2

On March 19, 2019, we entered into an amendment and limited waiver ("Amendment No. 15") to our Amended Credit Agreement, which allowed us to borrow $10.0 million of net proceeds from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. Interest rates were adjusted with Amendment No. 16 as described above. The total effective interest rate of Tranche A-2 was 15.93% on June 30, 2019. As of June 30, 2019, Tranche A-2 was payable in full on December 31, 2020 and may be prepaid, subject to the subordination provisions, but not re-borrowed. Interest rates of Tranche A-2 are described above. As described in Note 18, Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions.


64




Tranche A-3

Under Amendment No. 16, we borrowed $150.0 million face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The $141.4 million net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in Note 4, with the remainder used for working capital and general corporate purposes. Tranche A-3 included an original issue discount of 3.2% of the gross cash proceeds. An additional discount was recorded upon shareholder approval of the warrants and Equitization Transactions. These additional discounts totaled $8.1 million, which included $6.1 million for the estimated fair value of warrants issued to B. Riley, a related party, as described in Note 15 and Note 18 and $2.0 million for the intrinsic value of the beneficial conversion feature that allows conversion of a portion of the Tranche A-3 to equity under the Backstop Commitment described in Note 18. Both the warrants and the Backstop Commitment were contemplated in connection of the original extension of Tranche A-3.

Interest rates for Tranche A-3 are described above. The total effective interest rate of Tranche A-3 was 23.79% on June 30, 2019. Tranche A-3 may be prepaid, subject to the subordination provisions and as contemplated under the Equitization Transactions as described above and in Note 18, but not re-borrowed. As part of the July 23, 2019 Equitization Transactions described in Note 18, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million inclusive of the $8.2 million of principal value exchanged for common shares under the Backstop Commitment.
Immediately after completion of the Equitization Transactions, the Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and $114.0 million including accrued paid-in-kind interest was outstanding on Tranche A-3, and it bears interest at a fixed rate of 12.0% per annum payable in cash.

Equitization Transactions

In connection with Amendment No. 16 to the Amended Credit Agreement and the extension of Tranche A-3 of the Last Out Term Loans, the Company, B. Riley and Vintage, each related parties, entered into the "Letter Agreement" on April 5, 2019, pursuant to which the parties agreed to use their reasonable best efforts to effect a series of equitization transactions for a portion of the Last Out Term Loans, subject to, among other things, stockholder approval. Stockholder approval was received at the Company's annual stockholder meeting on June 14, 2019 and the contemplated transactions (the "Equitization Transactions") occurred on July 23, 2019. The Equitization Transactions included:

•
A $50.0 million rights offering ("2019 Rights Offering") as described in Note 17, for which B. Riley FBR, Inc. agreed to act as a backstop, by purchasing from us, at a price of $0.30 per share, all unsubscribed shares in the 2019 Rights Offering for cash or by exchanging an equal principal amount of outstanding Tranche A-2 or Tranche A-3 Last Out Term Loans (the "Backstop Commitment"). Under the 2019 Rights Offering, 166,666,667 shares of common stock were issued (16,666,666 shares of common stock after the reverse stock split), of which 125,891,701 shares (12,589,170 shares after the reverse stock split) were purchased through the exercise of rights in the rights offering generating $37.8 million of cash, 13,333,333 shares (1,333,333 shares after the reverse stock split) were issued through assigned portions of the Backstop Commitment generating an additional $4.0 million of cash, and the final 27,441,633 shares (2,744,163 shares after the reverse split) were exchanged for $8.2 million of principal value including accrued paid-in-kind interest of Tranche A-3 Last Out Term Loans. Shares issued in the 2019 Rights Offering and under the Backstop Commitment were then subject to the one-for-ten reverse stock split described in Note 1 and Note 16.
•
$10.3 million of the proceeds of 2019 Rights Offering were used to fully repay Tranche A-2 of the Last Out Term Loans including accrued paid-in-kind interest.
•
$31.5 million of the proceeds of the 2019 Rights Offering were used to partially prepay Tranche A-3 of the Last Out Term Loans including paid-in-kind interest. The total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million inclusive of the $8.2 million of principal value exchanged for common shares under the Backstop Commitment described above.
•
All $38.2 million of outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest was exchanged for 127,207,856 shares (12,720,785 shares after the reverse stock split) of common stock (107,207,856 shares (10,720,785 shares after the reverse stock split) to Vintage and 20,000,000 shares (2,000,000 shares after the reverse stock split) to affiliates of B. Riley) at a price of $0.30 per share (the "Debt Exchange"). Prior to the Debt Exchange, $6.0 million of Tranche A-1 was held by affiliates of B. Riley and the remainder was held by Vintage. Shares issued under the Debt Exchange were then subject to the one-for-ten reverse stock split described in Note 1 and Note 16.

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•
16,666,667 warrants, each to purchase one share of our common stock at an exercise price of $0.01 per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in Note 1, which adjusted the number of warrants to 1,666,666 and the exercise price remained $0.01.

Immediately after completion of the Equitization Transactions, Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and Tranche A-3 of the Last Out Term Loans had a balance of $114.0 million, including accrued paid-in-kind interest, which bears interest at a fixed rate of 12.0% per annum payable in cash and continues to bear the other terms described in Note 14. Based on Schedule 13D filings made by B. Riley and Vintage, as a result of the Equitization Transactions, Vintage increased its beneficial ownership in us to 32.8% and B. Riley increased its beneficial ownership in us to 18.4% inclusive of the outstanding warrants held by B. Riley.

Letters of Credit, Bank Guarantees and Surety Bonds

Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of June 30, 2019 and December 31, 2018 was $129.2 million and $175.9 million, respectively. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping letters of credit or bank guarantees was $31.3 million as of June 30, 2019. Of the letters of credit issued under the U.S. Revolving Credit Facility, $28.5 million are subject to foreign currency revaluation.

We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. 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 June 30, 2019, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $215.1 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $22.7 million.

Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.

2019 Rights Offering - Subsequent Event

On June 28, 2019, we distributed to holders of our common stock one nontransferable subscription right to purchase 0.986896 common shares for each common share held as of 5:00 p.m., New York City time, on June 27, 2019 at a subscription price of $0.30 per whole share of common stock (the "2019 Rights Offering"). The 2019 Rights Offering expired at 5:00 p.m., New York City time, on July 18, 2019, and settled on July 23, 2019. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2019 Rights Offering did not include an oversubscription privilege. Direct costs of the 2019 Rights Offering totaled $0.7 million for the three and six months ended June 30, 2019.

The 2019 Rights Offering resulted in the issuance of 139.3 million common shares (13.9 million common shares after the reverse stock split) as a result of the exercise of subscription rights in the offering. Gross proceeds from the 2019 Rights Offering were $41.8 million, $10.3 million which was used to fully repay Tranche A-2 of the Last Out Term Loans and the remaining $31.5 million was used to reduce outstanding borrowings under Tranche A-3 of the Last Out Term Loans. Concurrently with the closing of the 2019 Rights Offering, and in satisfaction of the Backstop Commitment as described in Note 18, the Company issued an aggregate of 27.4 million common shares (2.7 million common shares after the reverse stock split) in exchange for a portion of the Tranche A-3 Last Out Term Loans totaling $8.2 million, to B. Riley, a related party, as described in Note 24. The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization Transactions described in Note 18 and were approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.

2018 Rights Offering

On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase 1.4 million common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of

66




$3.00 per common share (the "2018 Rights Offering"). On April 10, 2018, we extended the expiration date and amended certain other terms regarding the 2018 Rights Offering. As amended, each right entitled holders to purchase 2.8 million common shares at a price of $2.00 per share. The 2018 Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2018 Rights Offering did not include an oversubscription privilege.

The 2018 Rights Offering resulted in the issuance of 124.3 million common shares (12.4 million common shares after the reverse stock split) on April 30, 2018. Gross proceeds from the 2018 Rights Offering were $248.4 million. Of the proceeds received, $214.9 million was used to fully repay the Second Lien Credit Agreement, including $2.3 million of accrued interest, and the remainder was used for working capital purposes. Direct costs of the 2018 Rights Offering totaled $3.3 million. The shares issued in the 2018 Rights Offering were then subject to the one-for-ten reverse stock split described in Note 1.

Warrants

On July 23, 2019, 16,666,667 warrants were issued to certain entities affiliated with B. Riley in connection with the Equitization Transactions described in Note 18. Each warrant was to purchase one share of our common stock at an exercise price of $0.01 per share were issued to B. Riley. The warrants were subsequently adjusted for the one-for-ten reverse stock split described in Note 1, which adjusted the number of warrants to 1,666,666 and the exercise price remained $0.01 per share.

The warrants were contemplated in the April 5, 2019 Letter Agreement (defined in Note 18) and on June 14, 2019, the issuance of the warrants was approved by stockholders in the Company's annual stockholder meeting, which established the grant date for accounting purposes. The grant date fair value of the warrants was estimated to be $6.1 million using the Black-Scholes option pricing model. The warrants may not be put back to the Company for cash, and they qualify for equity classification. The grant date value of the warrants was included as part of the original-issue discount based on the relative fair value method for Tranche A-3 of the Last Out Term Loans described in Note 14 because the value was part of the consideration required by the Tranche A-3 lender in order to extend the Tranche A-3 loans.

Common Shares

On June 14, 2019, after approval of the stockholders at the Company's annual meeting of stockholders, the Company amended its Amended and Restated Certificate of Incorporation to increase the authorized number of shares of the Company's common stock from 200,000,000 shares to 500,000,000 shares to allow for the Equitization Transactions described in Note 18. The reverse stock split on July 24, 2019, described in Note 1 did not affect the number of authorized shares.

On June 14, 2019, at the Company's annual meeting of stockholders, upon the recommendation of the Company's Board of Directors, the stockholders approved the Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (amended and restated as of June 14, 2019) (the "Fourth Amended and Restated 2015 LTIP"), which became effective upon such stockholder approval. The Fourth Amended and Restated 2015 LTIP, among other immaterial changes, increases the number of shares available for awards by 17,000,000 shares to a total of 29,271,731 shares of the Company's common stock, subject to adjustment as provided under the plan document. The increase in the maximum number of shares available for awards will allow us to establish the previously announced equity pool of 16,666,666 shares of its common stock for issuance for long-term incentive planning purposes.

Second Lien Term Loan Extinguished in 2018

On August 9, 2017, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of AIP, governing the Second Lien Term Loan Facility. The Second Lien Term Loan Facility consisted of a second lien term loan in the principal amount of $175.9 million, all of which was borrowed on August 9, 2017, and a delayed draw term loan facility in the principal amount of up to $20.0 million, which was drawn in a single draw on December 13, 2017.

On May 4, 2018, we fully repaid the Second Lien Term Loan Facility using $212.6 million of the proceeds from the 2018 Rights Offering, plus accrued interest of $2.3 million. A loss on extinguishment of this debt of approximately $49.2 million was recognized in the second quarter of 2018 as a result of the remaining $32.5 million unamortized debt discount on the date

67




of the repayment, $16.2 million of make-whole interest, and $0.5 million of fees associated with the extinguishment. See Note 19 for the Second Lien Term Loan Facility's interest expense.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited Condensed Consolidated Financial Statements, see "Critical Accounting Policies and Estimates" in our Annual Report. There have been no significant changes to our policies during the six months ended June 30, 2019.

Adoption of ASU 2016-02, Leases (Topic 842), did not have a material effect on our critical accounting policies and estimates. See Note 9 for further discussion.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposures to market risks have not changed materially from those disclosed under "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company's management, with the participation of our Chief Executive Officer and the Chief Financial Officer, has evaluated 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 Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures, 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, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2019 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 Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, we implemented ASU 2016-02, Leases (Topic 842). Although adoption of the lease standard had an immaterial impact on our results of operations, it materially impacted our Condensed Consolidated Balance Sheets. Therefore, we implemented changes to our processes related to our accounting for leases and the related control activities. These changes included implementing new lease software and training.

There were no other changes in our internal control over financial reporting during the six months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 21 to the unaudited Condensed Consolidated Financial Statements in Part I of this report, which we incorporate by reference into this Item.

Additionally, the Company has received subpoenas from the staff of the SEC in connection with an investigation into the accounting charges and related matters involving its Vølund & Other Renewable segment in 2016, 2017 and 2018. We are cooperating with the staff of the SEC related to the subpoenas and investigation. We cannot predict the length, scope or results of the investigation, or the impact, if any, of the investigation on our results of operations.

Item 1A. Risk Factors

We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under "Risk Factors' in our Annual Report. Other than the risk factors below, there have been no other material changes to such risk factors.

A small number of our stockholders could significantly influence our business and affairs.
 
As of July 23, 2019, Steel Partners Holdings, L.P., Vintage Capital Management, LLC ("Vintage"), and B. Riley FBR, Inc. ("B. Riley") beneficially owned approximately 12.4%, 32.8%% and 18.4% of our outstanding common stock and warrants, respectively (based on each entity's holdings reported on its most recent Schedule 13D filed with the SEC). Accordingly, a small number of our stockholders could be able to control matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. These stockholders can also take actions that have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our common stock, which could prevent other stockholders from receiving a premium for their shares. Further, these stockholders may also choose to sell a controlling position in our company in a privately negotiated transaction where they (but not our other stockholders) realize a control premium in connection with the sale. Any of these actions may be taken even if other stockholders oppose them.

B. Riley and Vintage are each significant stockholders of, and lenders to, the Company. A total of six of our seven directors on the Board have been designated by either Vintage or B. Riley pursuant to the Investor Rights Agreement. In addition, we are party to a consulting agreement with B. Riley for the services of our Chief Executive Officer. We are also party to a registration rights agreement with each of B. Riley and Vintage regarding the shares of common stock they hold. These various agreements and relationships may result in B. Riley and Vintage, and any associated directors and officers of the Company, having interests that may be different from those of our stockholders generally. B. Riley and Vintage are financial firms that invest in other companies and securities, including companies that may be our competitors.

We may become a "controlled company" within the meaning of NYSE listing standards. Consequently, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance rules and requirements.

B. Riley and Vintage, together, own more than 50% of our common stock, and, as a result, we may at some point in the future seek to be treated as a controlled company within the meaning of the NYSE listing standards. Under the NYSE listing standards, a controlled company may elect to not comply with certain NYSE corporate governance standards, including the requirements that (i) a majority of the Board of Directors consist of independent directors, (ii) it maintain a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities, (iii) it have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, and (iv) the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. We may in the future utilize any of these exemptions and others afforded to controlled companies, subject to the terms of any settlement agreement we may enter into in connection with the Federal Court Derivative Litigation and State Court Derivative Litigation described in Note 21 to the unaudited Condensed Consolidated Financial Statements in Part I of this report. Consequently, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate

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governance rules and requirements. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In accordance with the provisions of the employee benefit plans, the Company acquired the following shares in connection with the vesting of employee restricted stock that require us to repurchase shares to satisfy employee statutory income tax withholding obligations. The following table identifies the number of common shares and average purchase price paid by the Company, for each month during the quarter ended June 30, 2019.

Period
Total number of shares purchased (1) (2)
Average price paid per share (2)
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
April 2019
59

$
4.40

—

$
—

May 2019
126

$
3.10

—

$
—

June 2019
—

$
—

—

$
—

Total
185

$
3.52

—

$
—

(1) Repurchased shares are recorded in treasury stock in our Condensed Consolidated Balance Sheets.
(2) Total number of shares purchased and average price paid per share reflect the one-for-ten reverse stock split on July 24, 2019 as described in Note 1.


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Item 6. Exhibits
 
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))
 
 
 
 
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Babcock & Wilcox Enterprises, Inc., as filed with the Secretary of State of the State of Delaware on June 14, 2019 (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on June 17, 2019 (File No. 001-36876))
 
 
 
Certificate of Amendment of the Restated Certificate of Incorporation, as amended, of Babcock & Wilcox Enterprises, Inc., as filed with the Secretary of State of the State of Delaware on July 23, 2019 (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on July 24, 2019 (File No. 001-36876))
 
 
 
 
Amendment No. 16, dated April 5, 2019, to 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 the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 5, 2019 (File No. 001-36876))
 
 
 
 
Letter Agreement, dated April 5, 2019, among Babcock & Wilcox Enterprises, Inc., B. Riley FBR, Inc. and Vintage Capital Management, LLC (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 5, 2019 (File No. 001-36876))
 
 
 
 
Backstop Exchange Agreement, dated as of April 30, 2019, by and among Babcock & Wilcox Enterprises, Inc. and B. Riley FBR, Inc. (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 30, 2019 (File No. 001-36876))
 
 
 
 
Investor Rights Agreement, dated as of April 30, 2019, by and among Babcock & Wilcox Enterprises, Inc., B. Riley FBR, Inc. and Vintage Capital Management, LLC (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 30, 2019 (File No. 001-36876))
 
 
 
 
Registration Rights Agreement, dated as of April 30, 2019, by and among Babcock & Wilcox Enterprises, Inc., and certain investors party thereto (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 30, 2019 (File No. 001-36876))
 
 
 
 
Form of Warrant (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on July 24, 2019 (File No. 001-36876))
 
 
 
 
Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (Amended and Restated as of June 14, 2019) (incorporated by reference to Appendix G to the Babcock & Wilcox Enterprises, Inc. Definitive Proxy Statement filed with the Securities and Exchange Commission on May 13, 2019).
 
 
 
  
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
 
 
  
Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer
 
 
  
Section 1350 certification of Chief Executive Officer
 
 
  
Section 1350 certification of Chief Financial Officer
 
 
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
*
The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to the Company.


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SIGNATURES

Pursuant to the requirements 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.
 
 
 
August 8, 2019
By:
/s/ Louis Salamone
 
 
Louis Salamone
 
 
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer and Duly Authorized Representative)
 
 

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