Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - Willbros Group, Inc.\NEW\ | a3312018-exhibit322.htm |
| EX-32.1 - EXHIBIT 32.1 - Willbros Group, Inc.\NEW\ | a3312018-exhibit321.htm |
| EX-31.2 - EXHIBIT 31.2 - Willbros Group, Inc.\NEW\ | a3312018-exhibit312.htm |
| EX-31.1 - EXHIBIT 31.1 - Willbros Group, Inc.\NEW\ | a3312018-exhibit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q | ||
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
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 number 1-34259
Willbros Group, Inc. | ||
(Exact name of registrant as specified in its charter) | ||
Delaware | 30-0513080 | |
(Jurisdiction of incorporation) | (I.R.S. Employer Identification Number) | |
4400 Post Oak Parkway
Suite 1000
Houston, TX 77027
Telephone No.: 713-403-8000
(Address, including zip code, and telephone number, including area code, of principal executive offices of registrant)
NOT APPLICABLE | ||
(Former name, former address and former fiscal year, if changed since last report) | ||
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See 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 | ý |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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 ý
The number of shares of the registrant’s Common Stock, $.05 par value, outstanding as of May 7, 2018 was 63,219,047.
WILLBROS GROUP, INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2018
Page | |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
March 31, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,364 | $ | 33,472 | ||||
Accounts receivable, net | 134,560 | 142,192 | ||||||
Contract cost and recognized income not yet billed | 21,615 | 13,992 | ||||||
Prepaid expenses and other current assets | 24,405 | 20,760 | ||||||
Parts and supplies inventories | 2,432 | 1,152 | ||||||
Assets held for sale | 1,604 | 1,804 | ||||||
Assets associated with discontinued operations | 336 | 324 | ||||||
Total current assets | 206,316 | 213,696 | ||||||
Property, plant and equipment, net | 24,776 | 30,113 | ||||||
Intangible assets, net | 63,950 | 67,181 | ||||||
Restricted cash | 40,473 | 40,367 | ||||||
Other long-term assets | 13,524 | 12,520 | ||||||
Total assets | $ | 349,039 | $ | 363,877 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 141,884 | $ | 138,161 | ||||
Contract billings in excess of cost and recognized income | 9,346 | 17,814 | ||||||
Current maturities of long-term debt | 116,857 | 105,175 | ||||||
Short-term borrowings under revolving credit facility | 23,045 | 28,108 | ||||||
Accrued income taxes | 320 | 310 | ||||||
Other current liabilities | 6,200 | 6,056 | ||||||
Liabilities held for sale | — | 865 | ||||||
Current liabilities associated with discontinued operations | 1,028 | 1,091 | ||||||
Total current liabilities | 298,680 | 297,580 | ||||||
Long-term liabilities for unrecognized tax benefits | 612 | 603 | ||||||
Other long-term liabilities | 33,780 | 33,093 | ||||||
Long-term liabilities associated with discontinued operations | 794 | 893 | ||||||
Total liabilities | 333,866 | 332,169 | ||||||
Contingencies and commitments (Note 13) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $.01 per share, 1,000,000 shares authorized, none issued | — | — | ||||||
Common stock, par value $.05 per share, 105,000,000 shares authorized and 65,613,565 shares issued at March 31, 2018 (65,598,095 at December 31, 2017) | 3,272 | 3,271 | ||||||
Additional paid-in capital | 752,640 | 752,117 | ||||||
Accumulated deficit | (723,081 | ) | (706,116 | ) | ||||
Treasury stock at cost, 2,406,051 shares at March 31, 2018 (2,361,343 at December 31, 2017) | (15,729 | ) | (15,702 | ) | ||||
Accumulated other comprehensive loss | (1,929 | ) | (1,862 | ) | ||||
Total stockholders’ equity | 15,173 | 31,708 | ||||||
Total liabilities and stockholders’ equity | $ | 349,039 | $ | 363,877 | ||||
See accompanying notes to condensed consolidated financial statements.
4
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Contract revenue | $ | 200,980 | $ | 163,900 | ||||
Contract costs | 193,294 | 162,219 | ||||||
Contract income | 7,686 | 1,681 | ||||||
Amortization of intangibles | 2,399 | 2,417 | ||||||
General and administrative | 13,475 | 14,051 | ||||||
Gain on sale of assets | (6,080 | ) | (696 | ) | ||||
Other charges | 8,365 | 762 | ||||||
Operating loss | (10,473 | ) | (14,853 | ) | ||||
Interest expense | (6,528 | ) | (3,488 | ) | ||||
Interest income | 8 | 8 | ||||||
Other, net | 37 | (3 | ) | |||||
Loss from continuing operations before income taxes | (16,956 | ) | (18,336 | ) | ||||
Benefit for income taxes | (221 | ) | (600 | ) | ||||
Loss from continuing operations | (16,735 | ) | (17,736 | ) | ||||
Loss from discontinued operations net of provision for income taxes | (230 | ) | (31 | ) | ||||
Net loss | $ | (16,965 | ) | $ | (17,767 | ) | ||
Basic loss per share attributable to Company shareholders: | ||||||||
Loss from continuing operations | $ | (0.27 | ) | $ | (0.29 | ) | ||
Loss from discontinued operations | — | — | ||||||
Net loss | $ | (0.27 | ) | $ | (0.29 | ) | ||
Diluted loss per share attributable to Company shareholders: | ||||||||
Loss from continuing operations | $ | (0.27 | ) | $ | (0.29 | ) | ||
Loss from discontinued operations | — | — | ||||||
Net loss | $ | (0.27 | ) | $ | (0.29 | ) | ||
Weighted average number of common shares outstanding: | ||||||||
Basic | 62,404,906 | 61,829,768 | ||||||
Diluted | 62,404,906 | 61,829,768 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net loss | $ | (16,965 | ) | $ | (17,767 | ) | ||
Other comprehensive income (loss), net of tax | ||||||||
Foreign currency translation adjustments | (343 | ) | 219 | |||||
Changes in derivative financial instruments | 276 | 267 | ||||||
Total other comprehensive income (loss) net of tax | (67 | ) | 486 | |||||
Total comprehensive loss | $ | (17,032 | ) | $ | (17,281 | ) | ||
See accompanying notes to condensed consolidated financial statements.
6
WILLBROS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (16,965 | ) | $ | (17,767 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Loss from discontinued operations | 230 | 31 | ||||||
Depreciation and amortization | 4,315 | 5,037 | ||||||
Stock-based compensation | 524 | 906 | ||||||
Amortization of debt issuance costs | 718 | 410 | ||||||
Non-cash interest expense | 1,316 | 517 | ||||||
Provision (benefit) for deferred income taxes | — | (31 | ) | |||||
Gain on sale of assets | (6,080 | ) | (696 | ) | ||||
Provision for bad debt | 16 | 44 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 7,115 | 92 | ||||||
Contract cost and recognized income not yet billed | (7,655 | ) | (5,162 | ) | ||||
Prepaid expenses and other current assets | (3,694 | ) | (206 | ) | ||||
Accounts payable and accrued liabilities | 3,593 | 9,972 | ||||||
Accrued income taxes | 10 | 80 | ||||||
Contract billings in excess of cost and recognized income | (8,474 | ) | 2,724 | |||||
Assets held for sale | — | (8,670 | ) | |||||
Liabilities held for sale | — | 9,748 | ||||||
Other assets and liabilities, net | (908 | ) | (714 | ) | ||||
Cash used in operating activities from continuing operations | (25,939 | ) | (3,685 | ) | ||||
Cash used in operating activities from discontinued operations | (404 | ) | (240 | ) | ||||
Cash used in operating activities | (26,343 | ) | (3,925 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of property, plant and equipment | 7,848 | 1,094 | ||||||
Proceeds from sale of subsidiary | 2,500 | 950 | ||||||
Purchases of property, plant and equipment | (385 | ) | (493 | ) | ||||
Cash provided by investing activities from continuing operations | 9,963 | 1,551 | ||||||
Cash provided by (used in) investing activities from discontinued operations | — | — | ||||||
Cash provided by investing activities | 9,963 | 1,551 | ||||||
Cash flows from financing activities: | ||||||||
Proceeds from revolving credit facility | 72 | — | ||||||
Proceeds from Initial First-Out Loan | 10,000 | — | ||||||
Payments on revolving credit facility | (5,000 | ) | — | |||||
Cost of debt issuance | (528 | ) | (2,306 | ) | ||||
Payments to reacquire common stock | (27 | ) | (148 | ) | ||||
Cash provided by (used in) financing activities from continuing operations | 4,517 | (2,454 | ) | |||||
Cash provided by (used in) financing activities from discontinued operations | — | — | ||||||
Cash provided by (used in) financing activities | 4,517 | (2,454 | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (139 | ) | 86 | |||||
Net decrease in cash, cash equivalents and restricted cash | (12,002 | ) | (4,742 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 73,839 | 81,626 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 61,837 | $ | 76,884 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest (including discontinued operations) | $ | 3,786 | $ | 2,629 | ||||
Cash paid for income taxes (including discontinued operations) | $ | 7 | $ | 10 | ||||
See accompanying notes to condensed consolidated financial statements.
7
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company Description and Financial Condition
Company Description
Willbros Group, Inc. a Delaware corporation, and its subsidiaries (the “Company,” “Willbros” or “WGI”) is a specialty energy infrastructure contractor serving the oil and gas and power industries with offerings that primarily include construction, maintenance and facilities development services. The Company’s principal markets for continuing operations are the United States and Canada. The Company obtains its work through competitive bidding and negotiations with prospective clients. Contract values range from several thousand dollars to several hundred million dollars, and contract durations range from a few weeks to more than two years.
Business Segments
The Company has three reportable segments: Utility T&D, Canada and Oil & Gas.
The Utility T&D segment provides a wide range of services in electric and natural gas transmission and distribution, including comprehensive engineering, procurement, maintenance and construction, repair and restoration of utility infrastructure. These services include engineering, design, installation, maintenance, procurement and repair of electrical transmission, distribution, substation, wireless and gas distribution systems. The Company’s Utility T&D segment conducts projects ranging from small engineering and consulting projects to multi-million dollar turnkey distribution, substation and transmission line projects, including those required for renewable energy facilities.
On March 5, 2018, Oncor, the Company’s largest customer in the Utility T&D segment, notified the Company of its election to extend its alliance agreement under the terms and conditions currently in effect, through December 31, 2019.
The Company’s Canada segment provides construction, maintenance and fabrication services, including integrity and supporting civil work, pipeline construction, general mechanical and facility construction, American Petroleum Institute (“API”) storage tanks, general and modular fabrication, along with electrical and instrumentation projects serving the Canadian energy and water industries.
The Company’s Oil & Gas segment provides construction, maintenance and lifecycle extension services to the midstream markets. These services include facilities construction such as tank terminals, pump stations, flow stations, gas compressor stations and metering stations, as well as small-diameter midstream pipeline construction, integrity construction and system maintenance.
On January 2, 2018, the Company sold its tank services business, which was historically included in its Oil & Gas segment, to ATS Group, Inc. (“ATS”) for a $3.0 million purchase price subject to working capital and other adjustments. In connection with this transaction, the Company received cash proceeds of $2.5 million and recorded a net gain on sale of $1.0 million, which is included in the line item “Gain on sale of assets” in the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. See Note 5 – Assets Held for Sale for more information.
On January 9, 2018, the Company entered into an Asset Purchase Agreement to sell assets comprising its mainline pipeline construction business (the “Asset Purchase Agreement”), which was historically included in its Oil & Gas segment, to WB Pipeline, LLC, an affiliate of Meridien Energy, LLC. (“Meridien”). For more information, see the subsection “Sale of Mainline Pipeline Construction Business” below.
Merger Agreement
On March 27, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Primoris Services Corporation (“Primoris”) and Waco Acquisition Vehicle, Inc., a wholly-owned subsidiary of Primoris (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will be merged into the Company, and the Company will become a wholly owned subsidiary of Primoris. The Merger Agreement includes customary representations, warranties and covenants. Primoris will pay $0.60 per share for all of the Company’s outstanding common stock. The Merger Agreement is expected to close in the second quarter of 2018, subject to satisfaction of customary closing conditions, including approval of the Merger Agreement by the requisite vote of the Company’s stockholders. Upon termination of the Merger Agreement in certain circumstances, the Company is obligated to pay Primoris a termination fee of $4.3 million and, in certain other circumstances, a termination fee of $8.0 million.
8
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company Description and Financial Condition (continued)
Term Forbearance Agreement
On March 27, 2018, the Company entered into a Forbearance Agreement (the “Term Forbearance Agreement”) with the lenders under the 2014 Term Credit Agreement (the “Term Lenders”). Under the Term Forbearance Agreement, the Term Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Term Credit Agreement with respect to certain defaults and events of default (the “Term Specified Defaults”). The Term Forbearance Agreement is effective until the earliest of (i) August 15, 2018 or the closing of the Merger Agreement or (ii) the occurrence of any one of several specified termination events including, among other things, the termination of the Merger Agreement (the “Term Forbearance Period”). Upon expiration of the Term Forbearance Agreement or if the Company were to default under the Term Forbearance Agreement or the 2014 Term Credit Agreement, other than Term Specified Defaults, the Term Lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Term Credit Agreement.
ABL Forbearance Agreement
On March 27, 2018, the Company entered into a Limited Forbearance Agreement (the “ABL Forbearance Agreement”) with the lenders under the 2013 ABL Credit Facility (the “ABL Lenders”). Under the ABL Forbearance Agreement, the ABL Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2013 ABL Credit Facility with respect to certain defaults and events of default (the “ABL Specified Defaults”). The ABL Forbearance Agreement is effective until the earliest of (i) July 31, 2018 or the closing of the Merger Agreement or (ii) the occurrence of any one of several specified termination events including, among other things, the termination of the Merger Agreement (the “ABL Forbearance Period”). Upon expiration of the ABL Forbearance Agreement or if the Company were to default under the ABL Forbearance Agreement or the 2013 ABL Credit Facility, other than ABL Specified Defaults, the ABL Lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2013 ABL Credit Facility.
Seventh Amendment to the 2014 Term Credit Agreement
On March 27, 2018, the Company amended the 2014 Term Credit Agreement pursuant to a Seventh Amendment among the Company, as borrower, the guarantors from time to time party thereto, Primoris as initial first-out lender, the lenders from time to time party thereto and Cortland Capital Market Services LLC, as administrative agent (the “Seventh Amendment”). Under the terms of the Seventh Amendment, Primoris provided the Company with an additional term loan in an amount equal to $10.0 million (the “Initial First-Out Loan”) that was drawn in full on March 30, 2018 and bears the same maturity date as the aggregate outstanding principal balance of the Company’s 2014 Term Loan Facility.
In addition, under the terms of the Seventh Amendment, Primoris may provide the Company with additional term loans in an aggregate amount not to exceed $10.0 million (the “Additional First-Out Loans”). Interest payable with respect to the Initial First-Out Loan and any Additional First-Out Loans will be paid in-kind through additions to the principal amount of such loans.
The Seventh Amendment further provides that, until the termination of the Term Forbearance Period, the due date of any payments due and owing to the lenders (other than Primoris) under the 2014 Term Credit Agreement will be deferred until the fifth business day after the date of the termination of the Term Forbearance Period. In addition, the Seventh Amendment provides that the payment by the borrower of an amount equal to $100.0 million plus the expenses of the administrative agent in an amount not to exceed $1.1 million shall constitute payment in full and satisfaction and discharge of all obligations of the borrower and the other loan parties under the 2014 Term Credit Agreement, but solely if such payment is made in connection with the consummation of the merger.
Going Concern
In 2017, the Company incurred significant operating losses, cash outflows from operating activities and a net working capital deficiency. These significant operating losses continued to generate negative cash outflows in the first quarter of 2018. The Company is not in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the quarterly period ended March 31, 2018 and does not expect to be in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the 2014 Term Credit Agreement for the next twelve months, primarily due to these significant operating losses. In addition, the Company is currently not in compliance with certain other provisions under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, which expires on August 7, 2018. Absent the temporary forbearance provided under the Term Forbearance Agreement and the ABL Forbearance Agreement, all of the Company’s debt obligations would become due under the default provisions in the 2014 Term Credit Agreement and the 2013 ABL Credit
9
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company Description and Financial Condition (continued)
Facility. In addition, these significant operating losses and cash outflows have put a considerable strain on the Company’s overall liquidity. Although the Seventh Amendment provides the Company with additional short-term liquidity for the period between the signing of the Merger Agreement and the completion of the merger, the Company can provide no assurance that the merger will be completed. If the Company is unable to complete the merger, it will likely need to explore other strategic alternatives, which could include seeking protection under the U.S. Bankruptcy laws.
The Company’s continuing failure to comply with financial covenants and other covenants, its inability to extend or refinance the 2013 ABL Credit Facility and its continuing liquidity issues raise substantial doubt about its ability to continue as a going concern, notwithstanding the temporary forbearance provided under the Term Forbearance Agreement and the ABL Forbearance Agreement and the short-term liquidity provided by the Seventh Amendment.
In consideration of the above facts and circumstances, at March 31, 2018, the Company has classified all of its debt obligations as current, which has caused its current liabilities to far exceed its current assets since such date. These debt obligations, net of unamortized discount and debt issuance costs, approximate $139.9 million at March 31, 2018.
Sale of Mainline Pipeline Construction Business
On January 9, 2018, the Company entered into an Asset Purchase Agreement to sell assets comprising its mainline pipeline construction business to Meridien. The Asset Purchase Agreement, among other things, states that funding will occur in various stages in 2018 and in conjunction with the completed valuation of the assets and final approval by Meridien.
In connection with the Asset Purchase Agreement, the Company recorded a gain on sale of $4.4 million, which is included in the line item “Gain on sale of assets” in the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. The remaining assets associated with the Asset Purchase Agreement are classified as “Assets held for sale” in the Company’s Condensed Consolidated Balance Sheet at March 31, 2018. See Note 5 – Assets Held for Sale for more information.
In addition, as part of the Asset Purchase Agreement, the Company retained the three mainline pipeline construction projects associated with its mainline pipeline construction business through completion. Two of these projects have reached mechanical completion with an existing letter of credit returned in the first quarter of 2018. The remaining right-of-way restoration and other clean-up activities associated with these projects are expected to be completed by the end of the third quarter of 2018.
With respect to the remaining mainline pipeline construction project, in the first quarter of 2018, the Company reached an agreement with the customer to mutually conclude the remaining work. In addition, the agreement releases the Company from further liability at the completion of the project. As such, the Company has withdrawn and released any outstanding change orders or claims associated with the project.
2. Basis of Presentation
Condensed Consolidated Financial Information
The accompanying Condensed Consolidated Balance Sheet as of March 31, 2018, which has been derived from audited Consolidated Financial Statements, and the unaudited Condensed Consolidated Financial Statements as of March 31, 2018 and 2017, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. However, the Company believes the presentations and disclosures herein are adequate to make the information not misleading. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s December 31, 2017 audited Consolidated Financial Statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements reflect all recurring adjustments necessary to fairly state the financial position as of March 31, 2018, and the results of operations and cash flows of the Company for all interim periods presented. The results of operations and cash flows for the three months ended March 31, 2018 are not necessarily indicative of the operating results and cash flows to be achieved for the full year.
10
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation (continued)
Use of Estimates and Assumptions
The Condensed Consolidated Financial Statements include certain estimates and assumptions made by management. These estimates and assumptions relate to the reported amounts of assets and liabilities at the dates of the Condensed Consolidated Financial Statements and the reported amounts of revenue and expense during those periods. Significant items subject to such estimates and assumptions include revenue recognition over time, including estimates of progress towards completion and estimates of gross profit or loss accrual on contracts in progress; tax accruals and certain other accrued liabilities; quantification of amounts recorded for contingencies; valuation allowances for accounts receivable and deferred income tax assets; and the carrying amount of property, plant and equipment, goodwill and intangible assets. The Company bases its estimates on historical experience and other assumptions it believes to be relevant under the circumstances. Actual results could differ from those estimates.
The Company’s contract income was negatively impacted by $2.7 million for the three months ended March 31, 2018 as a result of changes in contract estimates related to projects that were in progress at December 31, 2017. The Company’s contract income was negatively impacted by $0.6 million for the three months ended March 31, 2017 as a result of changes in contract estimates related to projects that were in progress at December 31, 2016. These changes in contract estimates are primarily attributed to, among other things, changes in estimated costs for certain individually immaterial projects as they progress to completion; the realization of change orders related to work previously performed; and other changes in events, facts and circumstances during the period in which the estimate was revised.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications relate to the breakout of the line item “Gain on sale of assets” in the Company’s Condensed Consolidated Statements of Operations.
Change in Presentation
In the second quarter of 2017, the Company adopted a change in presentation on its Condensed Consolidated Statements of Operations in order to present a “Contract income” line item that is consistent with its peers. “Contract income” is defined as contract revenue less contract costs (which is inclusive of both direct and indirect costs). Previously reported information has been modified to conform to this new presentation.
3. New Accounting Standards
Recently Adopted Accounting Standards
In May 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award should be accounted for as a modification. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification, as an equity instrument or a liability instrument, of the modified award are the same before and after a change to the terms or conditions of the share-based payment award. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. This standard did not impact the Company’s Condensed Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, which requires a reporting entity to include restricted cash and restricted cash equivalents in its cash and cash-equivalent balances presented in the entity’s statement of cash flows. A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between non-restricted and restricted cash should not be presented as cash flow activities in the statement of cash flows. Furthermore, an entity with a material restricted cash balance must disclose information regarding the nature of the restrictions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company adopted this standard in the first quarter of 2018. See the Company’s Condensed Consolidated Statements of Cash Flows for more information.
In October 2016, the FASB issued ASU 2016-16, which requires a reporting entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The new guidance does not apply to intra-entity transfers of inventory, and the income tax
11
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. New Accounting Standards (continued)
consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. This standard did not impact the Company’s Condensed Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, which provides specific guidance for cash flow classifications of cash payments and receipts to reduce the diversity of treatment of such items. The standard is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods with early adoption permitted. This standard did not impact the Company’s Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20, 2017-13 and 2017-14. ASC 606 supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605)” and requires entities to recognize revenue when control of the promised goods or services are transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. See Note 4 – Revenue for more information.
Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, which provides that the stranded tax effects from the Tax Cuts and Jobs Act on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with an option to adopt early. The Company does not expect this standard to have a material impact on its Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, which requires companies that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those assets. The standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted for financial statements of fiscal years or interim periods that have not been previously issued. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements. Based on initial evaluation, the Company expects to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard.
12
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Revenue
Adoption of ASC 606, “Revenue from Contracts with Customers”
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. No adjustment to beginning 2018 retained earnings was recorded as a result of the Company’s adoption.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605.
For the first quarter of 2018, the difference between the Company’s financial results due to the application of ASC 606 on the Company’s contracts and the financial results if such contracts had been reported under ASC 605 was not material.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company elected to present amounts collected from customers for sales and other taxes net of the related amounts remitted. Therefore, such amounts are excluded from the determination of the transaction price.
The majority of the Company’s revenue is derived from long-term contracts and programs that can range from a few weeks to more than two years. The majority of these contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
The primary method used to estimate standalone selling price is the expected cost plus a margin approach. Under this method, the Company forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service. The Company’s performance obligations are satisfied over time as work progresses; therefore, substantially all its revenue in all of its segments is recognized over time. Customer contracts include a standard assurance warranty clause.
A portion of the Company’s revenue from goods and services transferred to customers is recognized over time using an input method (i.e. costs incurred to date relative to total estimated costs at completion) to measure progress to completion due to Company performance creating or enhancing an asset that the customer controls. Contract costs include labor, material and overhead. The remainder of the Company’s revenue from goods and services transferred to customers is recognized over time using an output method (i.e. units delivered or time units elapsed or a combination thereof). This method faithfully depicts the Company’s performance since it directly measures the value of the goods and services transferred to the customer and although not common, revenue is adjusted for any material unrecognized performed service. The Company incurs contract costs to fulfill performance obligations as an expense when recognizing revenue for services transferred to customers.
Additionally, as a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
At March 31, 2018, the Company had remaining performance obligations (“RPOs”) of $340.7 million. The Company expects to recognize approximately 69.8 percent of its RPOs at March 31, 2018 as revenue within the next twelve months with the remainder expected to be recognized by December 31, 2019.
Contract Estimates
A number of factors relating to the Company’s business affect the recognition of contract revenue. The Company typically structures contracts as unit-price, time and materials, fixed-price, cost plus fixed fee or a combination of fixed price and unit rates. The Company believes that its operating results should be evaluated over a time period during which major contracts in progress are completed and change orders, cost recoveries and other claims are negotiated and realized. Revenue from unit-price and time and materials contracts is recognized as delivered and earned.
13
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Revenue (continued)
Revenue for fixed-price and cost plus fixed fee contracts is recognized using the cost to cost input method. Under this method, estimated contract income and resulting revenue is generally accrued based on costs incurred to date as a percentage of total estimated costs, taking into consideration physical completion. Total estimated costs, and thus contract income, are impacted by changes in productivity, scheduling, unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and thus the estimated amount and timing of revenue recognition.
Shipping, handling & fulfillment activities are costs to fulfill the promise to transfer goods and services to the Company’s customers. The Company generally does not recognize income on a fixed-price contract until the contract is approximately five to ten percent complete, depending upon the nature of the contract. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.
Contract modifications are routine in the performance of the Company’s contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods and services that are not distinct, and therefore, are accounted for as part of the existing contract.
The Company considers unapproved change orders to be contract variations on which the Company has customer approval for scope change but not for price associated with that scope change. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are expensed as incurred. The Company recognizes revenue equal to cost incurred on unapproved change orders when realization of price approval is probable and the amount is estimable. Revenue recognized on unapproved change orders is included in “Contract cost and recognized income not yet billed” on the Condensed Consolidated Balance Sheets. Revenue recognized on unapproved change orders is subject to adjustment in subsequent periods to reflect the changes in estimates or final agreements with customers.
The nature of the Company’s contracts gives rise to several types of variable consideration, including claims, incentives and volume discounts. The Company considers claims to be amounts that the Company seeks or will seek to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Revenue from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are expensed when incurred. Certain fixed-price and cost plus fixed fee contracts include, or are amended to include, incentive bonus amounts, contingent on accomplishing a stated milestone. Revenue attributable to incentives is recognized when the risk and uncertainty surrounding the achievement of the milestone have been removed.
To the extent variable consideration is material, it can be estimated by either using an expected value method using probability weighting or using the most likely amount based on the single most likely amount that best predicts the amount of considerations to which the Company will be entitled based on the terms of the contract.
As a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and updates the contract-related estimates regularly. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
Contract Balances and Accounts Receivable
The timing of revenue recognition, billings and cash collections results in unbilled accounts receivables, contract assets and contract liabilities on the Company’s Condensed Consolidated Balance Sheets and are recorded on a contract-by-contract basis. Contract cost and recognized income not yet billed on uncompleted contracts (“contract assets”) arise when recorded revenues for a contract exceed the amounts billed under the terms of the contracts. These contract assets are recorded as receivables when the rights become unconditional. Contract billings in excess of cost and recognized income (“contract liabilities”) arise when billed amounts exceed revenues recorded. These contract liabilities primarily relate to the advance consideration received for customer contracts.
14
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Revenue (continued)
Contract assets and liabilities as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Cost incurred on contracts in progress | $ | 472,232 | $ | 445,029 | ||||
Recognized income | (20,699 | ) | (14,536 | ) | ||||
451,533 | 430,493 | |||||||
Progress billings and advance payments | (439,264 | ) | (434,315 | ) | ||||
$ | 12,269 | $ | (3,822 | ) | ||||
Contract cost and recognized income not yet billed (contract assets) | $ | 21,615 | $ | 13,992 | ||||
Contract billings in excess of cost and recognized income (contract liabilities) | (9,346 | ) | (17,814 | ) | ||||
Net contract assets (liabilities) | $ | 12,269 | $ | (3,822 | ) | |||
The increase from a net contract liability to a net contract asset at March 31, 2018, is primarily driven by revenue recognized upon satisfaction of performance obligations, partially offset by cash payments received or due in advance of satisfying performance obligations. Changes in the contract asset and liability balances during the three-month period ended March 31, 2018, were not materially impacted by any other factors, other than revenue recognition and billings.
Contract cost and recognized income not yet billed includes $1.6 million and $0.5 million at March 31, 2018 and December 31, 2017, respectively, on completed contracts.
For the three months ended March 31, 2018, $16.4 million of revenue was recognized during the period that was included in the contract liability balance at January 1, 2018.
The Company’s payment terms vary by the type and location of its customer and the type of services offered. The term between invoicing and when payment is due is not significant. Although uncommon, to the extent material, the Company includes a significant financing component in the transaction price at contract inception when it expects the period between customer payment and transfer of control of the promised goods or services to exceed one year.
The balances billed but not paid by customers pursuant to retainage provisions in certain contracts are generally due upon completion of the contracts and acceptance by the customer. Based on the Company’s contract terms in recent years, the majority of the retainage balances at each balance sheet date are expected to be collected within the next 12 months. Current retainage balances at March 31, 2018 and December 31, 2017, were approximately $22.8 million and $26.1 million, respectively, and are included in “Accounts receivable, net” in the Condensed Consolidated Balance Sheets. There were $0.3 million and no retainage balances with settlement dates beyond the next 12 months at March 31, 2018 and December 31, 2017, respectively.
As of March 31, 2018 and December 31, 2017, accounts receivables related to products and services were $133.9 million and $141.3 million, respectively. For the three months ended March 31, 2018, the Company had an immaterial amount of bad debt expense.
15
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Revenue (continued)
Disaggregation of Revenue
The following table presents the Company’s disaggregated revenue for the three months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, | ||||||||
2018 | 2017 (1) | |||||||
Utility T&D | ||||||||
Transmission and substation services | $ | 42,426 | $ | 48,593 | ||||
West distribution services | 27,603 | 29,438 | ||||||
East distribution services | 18,752 | 24,101 | ||||||
Southeast distribution services | 15,181 | 6,735 | ||||||
Engineering services | 4,428 | 3,591 | ||||||
Other | 4,222 | 3,050 | ||||||
Total Utility T&D | $ | 112,612 | $ | 115,508 | ||||
Canada | ||||||||
Construction and maintenance services | $ | 17,289 | $ | 18,138 | ||||
Facilities and tank services | 5,053 | 1,983 | ||||||
Project and specialty services | 2,969 | 5,874 | ||||||
Other | 492 | (35 | ) | |||||
Total Canada | $ | 25,803 | $ | 25,960 | ||||
Oil & Gas | ||||||||
Facilities construction services | $ | 42,015 | $ | 3,595 | ||||
Small-diameter midstream pipeline construction services | 3,281 | 2,478 | ||||||
Mainline pipeline construction services | 11,723 | 5,340 | ||||||
Tank services | 5,620 | 10,626 | ||||||
Integrity construction services | — | 393 | ||||||
Total Oil & Gas | $ | 62,639 | $ | 22,432 | ||||
Eliminations | $ | (74 | ) | $ | — | |||
Contract revenue (2) | $ | 200,980 | $ | 163,900 | ||||
(1) Prior period amounts have not been adjusted under the modified retrospective method.
(2) See Note 12 – Segment Information for additional information.
16
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Assets Held for Sale
Components of assets held for sale as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Accounts receivable, net | $ | — | $ | 490 | ||||
Contract cost and recognized income not yet billed | — | 234 | ||||||
Prepaid expenses and other assets | — | 36 | ||||||
Parts and supplies inventories | — | 409 | ||||||
Property, plant and equipment, net | 1,604 | 375 | ||||||
Intangible assets, net | — | 260 | ||||||
Total assets held for sale | $ | 1,604 | $ | 1,804 | ||||
Accounts payable and accrued liabilities | $ | — | $ | 100 | ||||
Contract billings in excess of cost and recognized income | — | 765 | ||||||
Total liabilities held for sale | $ | — | $ | 865 | ||||
The Company, as part of its ongoing strategic evaluation, made the decision to offer the sale of its tank services business, which is included in the Company’s Oil & Gas segment, to an outside party. At December 31, 2017, the tank services business was classified as held for sale, as it was being actively marketed, expected to sell within one year and measured at the lower of carrying value or fair value less costs to sell.
On January 2, 2018, the Company sold its tank services business to ATS for a $3.0 million purchase price subject to working capital and other adjustments. Certain contracts and other working capital associated with the tank services business were retained by the Company and not included in the sale to ATS. In connection with this transaction, the Company recorded a gain on sale of $1.0 million, which is included in the line item “Gain on sale of assets” in the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2018.
On January 9, 2018, the Company entered into an Asset Purchase Agreement to sell assets comprising its mainline pipeline construction business to Meridien. The Asset Purchase Agreement, among other things, states that funding will occur in various stages in 2018 and in conjunction with the completed valuation of the assets and final approval by Meridien. In connection with the Asset Purchase Agreement, the Company recorded a gain on sale of $4.4 million, which is included in the line item “Gain on sale of assets” in the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. The remaining assets associated with the Asset Purchase Agreement are expected to be sold to Meridien in the second quarter of 2018 and are measured at the lower of carrying value or fair value less costs to sell. These assets are classified as “Assets held for sale” in the Company’s Condensed Consolidated Balance Sheet at March 31, 2018.
6. Intangible Assets
At March 31, 2018, the Company’s intangible assets with finite lives include customer relationships and trade names within the Utility T&D segment. The changes in the carrying amounts of intangible assets for the three months ended March 31, 2018 are detailed below (in thousands):
Customer Relationships | Trademark / Tradename | Total | ||||||||||
Balance as of December 31, 2017 | $ | 64,503 | $ | 2,678 | $ | 67,181 | ||||||
Amortization | (2,131 | ) | (268 | ) | (2,399 | ) | ||||||
Disposal | (832 | ) | — | (832 | ) | |||||||
Balance as of March 31, 2018 | $ | 61,540 | $ | 2,410 | $ | 63,950 | ||||||
Weighted average remaining amortization period | 7.3 years | 2.3 years | ||||||||||
Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 5 to 15 years.
17
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Intangible Assets (continued)
Estimated amortization expense for the remainder of 2018 and each of the subsequent five years and thereafter is as follows (in thousands):
Fiscal year: | ||||
Remainder of 2018 | $ | 7,169 | ||
2019 | 9,559 | |||
2020 | 9,027 | |||
2021 | 8,489 | |||
2022 | 8,489 | |||
2023 | 8,489 | |||
Thereafter | 12,728 | |||
Total amortization | $ | 63,950 | ||
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Trade accounts payable | $ | 71,102 | $ | 54,414 | ||||
Payroll and payroll liabilities | 13,027 | 12,185 | ||||||
Accrued contract costs | 39,555 | 52,847 | ||||||
Self-insurance accrual | 6,850 | 6,601 | ||||||
Other accrued liabilities | 11,350 | 12,114 | ||||||
Total accounts payable and accrued liabilities | $ | 141,884 | $ | 138,161 | ||||
Accrued contract costs includes $5.0 million and $12.2 million at March 31, 2018 and December 31, 2017, respectively, related to provisions on loss projects.
The self-insurance accrual includes $6.9 million and $6.6 million of short-term liabilities at March 31, 2018 and December 31, 2017, respectively. The remaining $17.9 million and $17.2 million of the self-insurance accrual is included within “Other long-term liabilities” on the Condensed Consolidated Balance Sheet at March 31, 2018 and the Consolidated Balance Sheet at December 31, 2017, respectively.
8. Debt Obligations
The Company’s debt obligations as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Aggregate outstanding principal balance, 2014 Term Loan Facility | $ | 107,224 | $ | 107,224 | ||||
Aggregate outstanding principal balance, Initial First-Out Loan | 10,000 | — | ||||||
Repayment fee, 2014 Term Loan Facility | 9,650 | 9,650 | ||||||
Unamortized discount – repayment fee, 2014 Term Loan Facility | (6,195 | ) | (7,235 | ) | ||||
Unamortized debt issuance costs, 2014 Term Loan Facility | (3,822 | ) | (4,464 | ) | ||||
Revolver borrowings, 2013 ABL Credit Facility | 23,045 | 28,108 | ||||||
Total debt obligations, net of unamortized discount and debt issuance costs | $ | 139,902 | $ | 133,283 | ||||
Current maturities of long-term debt | $ | 116,857 | $ | 105,175 | ||||
Short-term borrowings under revolving credit facility | 23,045 | 28,108 | ||||||
Total debt obligations, net of unamortized discount and debt issuance costs | $ | 139,902 | $ | 133,283 | ||||
18
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt Obligations (continued)
2014 Term Loan Facility
On December 15, 2014, the Company entered into the 2014 Term Credit Agreement among the Company, certain of its subsidiaries, as guarantors, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. Cortland Capital Market Services LLC currently serves as administrative agent under the 2014 Term Credit Agreement.
Principal, Interest and Maturity
The 2014 Term Credit Agreement initially provided for a five-year $270.0 million term loan facility (the “2014 Term Loan Facility”), which the Company drew in full on the effective date of the 2014 Term Credit Agreement. Effective November 6, 2017, the Company amended the 2014 Term Credit Agreement pursuant to a Sixth Amendment (the “Sixth Amendment”). The Sixth Amendment, among other things, provides for an additional term loan in an amount equal to $15.0 million, which is pari passu in right of payment with, and secured on a pari passu basis with the aggregate outstanding principal balance of the Company’s 2014 Term Loan Facility. The additional term loan was drawn in full on November 17, 2017 (the “Sixth Amendment Funding Date”) and bears the same maturity date as the aggregate outstanding principal balance of the Company’s 2014 Term Loan Facility. At March 31, 2018, the aggregate outstanding principal balance of the 2014 Term Loan Facility was approximately $107.2 million.
The 2014 Term Loan Facility initially bore interest at the “Adjusted Base Rate” plus an applicable margin of 8.75 percent, or the “Eurodollar Rate” plus an applicable margin of 9.75 percent. On the Sixth Amendment Funding Date, the interest rate increased to 13 percent, consisting of an applicable margin of 11.75 percent for Eurodollar Rate loans plus a LIBOR floor of 1.25 percent. The interest rate in effect at March 31, 2018 and December 31, 2017 was 13 percent. Beginning September 30, 2018, the applicable margin will increase an additional 100 basis points each quarterly period until maturity.
On March 27, 2018, the Company amended the 2014 Term Credit Agreement pursuant to the Seventh Amendment. Under the terms of the Seventh Amendment, Primoris provided the Company with an Initial First-Out Loan in an amount equal to $10.0 million that was drawn in full on March 30, 2018 and bears the same maturity date as the aggregate outstanding principal balance of the Company’s 2014 Term Loan Facility. In addition, Primoris may provide the Company with Additional First-Out Loans up to $10.0 million. See Note 1 – Company Description and Financial Condition for more information.
Makewhole
Under the 2014 Term Credit Agreement, with respect to prepayments made from inception of the Term Loan through March 31, 2018, the Company has not been required to pay prepayment premiums in respect of the “makewhole amount.” However, future prepayments or refinancing of the balance of the 2014 Term Loan Facility may require the Company to pay a prepayment premium equal to the makewhole amount and the repayment fee described below. Pursuant to the Sixth Amendment and beginning with the Sixth Amendment Funding Date, if a prepayment is made on or before September 30, 2018, the makewhole amount will be calculated as the present value of all interest payments that would have been made on the amount prepaid from the date of the prepayment to June 15, 2019 at a rate per annum equal to the sum of the applicable margin on the date of the prepayment plus the greater of 1.25 percent and the Eurodollar rate in effect on the date of the repayment. If a prepayment is made after September 30, 2018, the makewhole amount will be calculated as the present value of all interest payments that would have been made on the amount prepaid from the date of the prepayment to December 15, 2019 at a rate per annum equal to the sum of the applicable margin on the date of the prepayment plus the greater of 1.25 percent and the Eurodollar rate in effect on the date of the repayment.
Should a prepayment in full occur under the Sixth Amendment, the estimated makewhole amount due at future prepayment dates would be as follows (in thousands):
June 30, 2018 | September 30, 2018 | December 31, 2018 | March 31, 2019 | June 30, 2019 | September 30, 2019 | |||||||||||||||||||
Makewhole | $ | 13,358 | $ | 9,874 | $ | 16,888 | $ | 12,331 | $ | 7,595 | $ | 3,350 | ||||||||||||
Repayment Fee
Prior to the Sixth Amendment, the Company was also required to pay a repayment fee on the date of any prepayment and on the maturity date of the 2014 Term Loan Facility equal to a total of $4.6 million, which was 5.0 percent of the amount prepaid or 5.0 percent of the aggregate remaining outstanding principal balance on the maturity date. Pursuant to the Sixth Amendment and beginning with the Sixth Amendment Funding Date, the repayment fee increased to a total of $9.7 million,
19
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt Obligations (continued)
which is 9.0 percent of the amount prepaid or 9.0 percent of the aggregate remaining outstanding principal balance on the maturity date. The Company is amortizing the repayment fee as a discount, from that date through the maturity date of the 2014 Term Loan Facility, using the effective interest method. The unamortized amount of the repayment fee was $6.2 million and $7.2 million at March 31, 2018 and December 31, 2017, respectively, based on the 9.0 percent repayment fee in effect as of those dates.
Term Loan Discounted Payoff
The Seventh Amendment provides that the payment by the borrower of an amount equal to $100.0 million plus the expenses of the administrative agent in an amount not to exceed $1.1 million shall constitute payment in full and satisfaction and discharge of all obligations of the borrower and the other loan parties under the 2014 Term Credit Agreement, but solely if such payment is made in connection with the consummation of the merger. Accordingly, if the 2014 Term Loan Facility is paid off in connection with the closing of the merger, no amounts will be owed in respect of the makewhole amount and the repayment fee. Based on the above information, the settlement of the debt at the discounted amount is considered a troubled debt restructuring transaction. However, given the settlement of the debt at the discounted amount is contingent upon the consummation of the merger, the Company has not recorded an adjustment to its Condensed Consolidated Financial Statements.
Debt Covenants
On March 31, 2015 (the “First Amendment Closing Date”), March 1, 2016, July 26, 2016 and March 3, 2017, the Company amended the 2014 Term Credit Agreement pursuant to a First Amendment (the “First Amendment”), a Third Amendment, a Fourth Amendment and a Fifth Amendment (the “Fifth Amendment”). These amendments, among other things, suspended the calculation of the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the period from December 31, 2014 through June 30, 2017 (the “Covenant Suspension Periods”) so that any failure by the Company to comply with the Maximum Total Leverage Ratio or Minimum Interest Coverage Ratio during the Covenant Suspension Periods shall not be deemed to result in a default or event of default.
In consideration of the initial suspension of the calculation of the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the First Amendment, the Company issued 10.1 million shares, which was equivalent to 19.9 percent of the then outstanding shares of common stock immediately prior to the First Amendment Closing Date, to KKR Lending Partners II L.P. and other entities indirectly advised by KKR Credit Advisers (US) LLC, which made them a related party. In connection with this transaction, the Company recorded debt covenant suspension charges of approximately $33.5 million, which represented the fair value of the 10.1 million outstanding shares of common stock issued, multiplied by the closing stock price on the First Amendment Closing Date. In addition, the Company recorded debt extinguishment charges of approximately $0.8 million related to the write-off of debt issuance costs associated with the Company’s 2014 Term Credit Agreement.
In consideration for the Fifth Amendment, the Company paid a $2.3 million amendment fee during the three months ended March 31, 2017. The amendment fee is recorded as a direct deduction from the carrying amount of the 2014 Term Loan Facility and is being amortized through the maturity date of the 2014 Term Loan Facility using the effective interest method.
The Sixth Amendment suspended compliance with the Maximum Total Leverage Ratio and the Minimum Interest Coverage Ratio covenants through December 31, 2017. In addition, under the Sixth Amendment, the Maximum Total Leverage Ratio was 5.50 to 1.00 as of March 31, 2018 and will decrease to 4.50 to 1.00 as of June 30, 2018, 4.25 to 1.00 as of September 30, 2018 and 3.00 to 1.00 as of March 31, 2019, and thereafter. The Minimum Interest Coverage Ratio was 1.75 to 1.00 as of March 31, 2018, will increase to 2.00 to 1.00 as of June 30, 2018, decrease to 1.50 to 1.00 as of December 31, 2018 and increase to 2.75 to 1.00 as of March 31, 2019, and thereafter. The Sixth Amendment also provided that, for the four-quarter period ending March 31, 2018, Consolidated EBITDA was equal to the sum of Consolidated EBITDA for the quarterly periods ending December 31, 2017 and March 31, 2018 multiplied by two, and, for the four-quarter period ending June 30, 2018, Consolidated EBITDA shall be equal to the annualized sum of Consolidated EBITDA for the quarterly periods ending December 31, 2017, March 31, 2018 and June 30, 2018.
The Company is not in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the quarterly period ended March 31, 2018 and does not expect to be in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the 2014 Term Credit Agreement for the next twelve months. In addition, the Company is currently not in compliance with certain other provisions under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, which expires on August 7, 2018. Absent the temporary forbearance provided under the Term Forbearance
20
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt Obligations (continued)
Agreement and the ABL Forbearance Agreement, the lenders would have the right to require immediate repayment of all of the Company’s debt obligations under the default provisions in the 2014 Term Credit Agreement and the 2013 ABL Credit Facility.
Other
The Company is the borrower under the 2014 Term Credit Agreement, with all of its obligations guaranteed by its material U.S. subsidiaries, other than excluded subsidiaries. Obligations under the 2014 Term Loan Facility are secured by a first priority security interest in, among other things, the borrower’s and the guarantors’ equipment, subsidiary capital stock and intellectual property (the “2014 Term Loan Priority Collateral”) and a second priority security interest in, among other things, the borrower’s and the guarantors’ inventory, accounts receivable, deposit accounts and similar assets.
Unamortized debt issuance costs, primarily related to amendment fees associated with the 2014 Term Loan Facility, were $3.8 million and $4.5 million at March 31, 2018 and December 31, 2017, respectively. These costs are being amortized through the maturity date of the 2014 Term Loan Facility using the effective interest method.
2013 ABL Credit Facility
On August 7, 2013, the Company entered into a five-year asset based senior revolving credit facility maturing on August 7, 2018 with Bank of America, N.A. serving as sole administrative agent for the lenders thereunder, collateral agent, issuing bank and swingline lender (as amended, the “2013 ABL Credit Facility”).
The aggregate amount of commitments for the 2013 ABL Credit Facility is $100.0 million, which is comprised of $90.0 million for the U.S. facility (the “U.S. Facility”) and $10.0 million for the Canadian facility (the “Canadian Facility”). At March 31, 2018, the Company had approximately $23.0 million in outstanding borrowings under the 2013 ABL Credit Facility for working capital purposes.
The 2013 ABL Credit Facility includes a sublimit of $80.0 million for letters of credit. The borrowers under the U.S. Facility consist of all of the Company’s U.S. operating subsidiaries with assets included in the borrowing base, and the U.S. Facility is guaranteed by Willbros Group, Inc. and its material U.S. subsidiaries, other than excluded subsidiaries. The borrower under the Canadian Facility is Willbros Construction Services (Canada) LP, and the Canadian Facility is guaranteed by Willbros Group, Inc. and all of its material U.S. and Canadian subsidiaries, other than excluded subsidiaries.
Advances under the U.S. and Canadian Facilities are limited to a borrowing base consisting of the sum of the following, less applicable reserves:
• | 85 percent of the value of “eligible accounts” (as defined in the 2013 ABL Credit Facility); |
• | the lesser of (i) 75 percent of the value of “eligible unbilled accounts” (as defined in the 2013 ABL Credit Facility) and (ii) $33.0 million minus the amount of eligible unbilled accounts then included in the borrowing base; and |
• | “eligible pledged cash”. |
The Company is also required, as part of its borrowing base calculation, to include a minimum of $25.0 million of the net proceeds of the sale of Bemis, LLC and the balance of the Professional Services segment as eligible pledged cash. The Company has included $40.0 million as eligible pledged cash in its March 31, 2018 borrowing base calculation, which is included in the “Restricted cash” line item on its Condensed Consolidated Balance Sheets.
The aggregate amount of the borrowing base attributable to eligible accounts and eligible unbilled accounts constituting certain progress or milestone billings, retainage and other performance-based benchmarks may not exceed $23.0 million.
Advances in U.S. dollars bear interest at a rate equal to LIBOR or the U.S. or Canadian base rate plus an additional margin. Advances in Canadian dollars bear interest at the Bankers Acceptance (“BA”) Equivalent Rate or the Canadian prime rate plus an additional margin.
21
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt Obligations (continued)
The interest rate margins will be adjusted each quarter based on the Company’s fixed charge coverage ratio as of the end of the previous quarter as follows:
Fixed Charge Coverage Ratio | U.S. Base Rate, Canadian Base Rate and Canadian Prime Rate Loans | LIBOR Loans, BA Rate Loans and Letter of Credit Fees | ||
>1.25 to 1 | 1.25% | 2.25% | ||
<1.25 to 1 and >1.15 to 1 | 1.50% | 2.50% | ||
<1.15 to 1 | 1.75% | 2.75% | ||
The Company will also pay an unused line fee on each of the U.S. and Canadian Facilities equal to 50 basis points when usage under the applicable facility during the preceding calendar month is less than 50 percent of the commitments or 37.5 basis points when usage under the applicable facility equals or exceeds 50 percent of the commitments for such period. With respect to the letters of credit, the Company will pay a letter of credit fee equal to the applicable LIBOR margin, shown in the table above, on all letters of credit and a 0.125 percent fronting fee to the issuing bank, in each case, payable monthly in arrears.
Obligations under the 2013 ABL Credit Facility are secured by a first priority security interest in the borrowers’ and guarantors’ accounts receivable, deposit accounts and similar assets (the “ABL Priority Collateral”) and a second priority security interest in the 2014 Term Loan Priority Collateral.
In the first quarter of 2018, the Company repaid $5.0 million of its outstanding borrowings under the 2013 ABL Credit Facility using available cash on hand.
If the Company’s unused availability under the 2013 ABL Credit Facility is less than the greater of (i) 15.0 percent of the revolving commitments or $15.0 million for five consecutive days, or (ii) 12.5 percent of the revolving commitments or $12.5 million at any time, or upon the occurrence of certain events of default under the 2013 ABL Credit Facility (“Cash Dominion”), the Company is subject to increased reporting requirements, the administrative agent shall have exclusive control over any deposit account, the Company will not have any right of access to, or withdrawal from, any deposit account, or any right to direct the disposition of funds in any deposit account, and amounts in any deposit account will be applied to reduce the outstanding amounts under the 2013 ABL Credit Facility. In addition, if the Company’s unused availability under the 2013 ABL Credit Facility is less than the amounts described above, the Company would be required to comply with a Minimum Fixed Charge Coverage Ratio of 1.15 to 1.00.
Pursuant to the ABL Forbearance Agreement, the aggregate amount of commitments under the 2013 ABL Credit Facility has been reduced from $100.0 million to $90.0 million, which is comprised of $80.0 million for the U.S. Facility and $10.0 million for the Canadian Facility. In addition, during the ABL Forbearance Period, the Company may not request any additional loans or any new or increased letters of credit. The ABL Forbearance Agreement also provides that Cash Dominion will occur if the Company’s unused availability under the 2013 ABL Credit Facility is less than $10.0 million at any time. Under its March 31, 2018 borrowing base certificate, the Company’s unused availability under the 2013 ABL Credit Facility was $12.3 million, which is in accordance with the ABL Forbearance Agreement.
The Company gives no assurance that it will continue to be able to avoid Cash Dominion under the 2013 ABL Credit Facility. If the Minimum Fixed Charge Coverage Ratio were to become applicable, the Company would not expect to be in compliance over the next twelve months and would therefore be in default under its credit agreements.
Events of Default
A default under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility may be triggered by events such as a failure to comply with financial covenants or other covenants under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, a failure to make payments when due under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, a failure to make payments when due in respect of, or a failure to perform obligations relating to, debt obligations in excess of $15.0 million, a change of control of the Company and certain insolvency proceedings. A default under the 2013 ABL Credit Facility would permit the lenders to terminate their commitment to make cash advances or issue letters of credit, require the immediate repayment of any outstanding cash advances with interest and require the cash collateralization of outstanding letter of credit obligations. A default under the 2014 Term Credit Agreement would permit the lenders to require immediate repayment of all principal, interest, fees and other amounts payable thereunder.
The 2014 Term Credit Agreement and the 2013 ABL Credit Facility also include customary representations and warranties and affirmative and negative covenants, including:
22
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt Obligations (continued)
• | the preparation of financial statements in accordance with GAAP; |
• | the ability to deliver an audit opinion without a going concern explanation; |
• | the identification of any events or circumstances, either individually or in the aggregate, that has had or could reasonably be expected to have a material adverse effect on the business, results of operations, properties or financial condition of the Company; |
• | limitations on liens and indebtedness; |
• | limitations on dividends and other payments in respect of capital stock; |
• | limitations on capital expenditures; and |
• | limitations on modifications of the documentation of the 2013 ABL Credit Facility. |
The Company’s inability to deliver its 2017 audited financial statements without a going concern explanation constitutes an event of default under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility. See Note 1 – Company Description and Financial Condition for more information.
On March 27, 2018, the Company entered into a Term Forbearance Agreement with the Term Lenders and an ABL Forbearance Agreement with the ABL Lenders. If the merger with Primoris is not completed, or if these forbearance agreements were to expire or be terminated prior to the completion of the merger, the Term Lenders and ABL Lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, respectively. See Note 1 – Company Description and Financial Condition for more information.
Fair Value of Debt
The estimated fair value of the Company’s debt instruments as of March 31, 2018 and December 31, 2017 was as follows (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
2014 Term Loan Facility | $ | 119,251 | $ | 119,042 | ||||
Initial First-Out Loan | 10,000 | — | ||||||
Revolver borrowings, 2013 ABL Credit Facility | 23,045 | 28,108 | ||||||
Total fair value of debt instruments | $ | 152,296 | $ | 147,150 | ||||
The 2014 Term Loan Facility, Initial First-Out Loan and revolver borrowings under the 2013 ABL Credit Facility are classified within Level 2 of the fair value hierarchy. The fair value of the 2014 Term Loan Facility (other than the Initial First-Out Loan) has been estimated using discounted cash flow analyses based on the Company’s incremental borrowing rate for similar borrowing arrangements. The fair value of the Initial First-Out Loan and the revolver borrowings approximates its carrying value.
9. Income Taxes
The Company’s interim tax provision (benefit) has been estimated using the discrete method, which is based on statutory tax rates applied to pre-tax income as adjusted for permanent differences such as transfer pricing differences between generally accepted accounting principles and local country tax. The Company believes this method yields a more reliable income tax calculation for interim periods.
The effective tax rate on continuing operations was 1.3 percent for the three months ended March 31, 2018 and 3.3 percent for the three months ended March 31, 2017. There was no tax benefit or expense for discrete items for the three months ended March 31, 2018. The tax benefit for discrete items for the three months ended March 31, 2017 was $0.5 million. This amount is composed primarily of a refundable federal alternative minimum tax credit carry-forward. The tax benefit for the three months ended March 31, 2018 was $0.2 million, primarily due to a benefit on a loss in the Company’s Canada segment and the Texas Margins Tax. The tax benefit for the three months ended March 31, 2017 was $0.6 million, primarily due to a refundable federal alternative minimum tax credit carry-forward and a benefit on a loss in the Company’s Canada segment.
23
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Income Taxes (continued)
The Company has reserved for the benefit of current year losses in the United States. As of March 31, 2018, U.S. federal and state and Canadian deferred tax assets continue to be covered by valuation allowances. In evaluating whether deferred tax assets are more likely than not to be realized, the Company considers the impact of reversing taxable temporary differences, future forecasted income and available tax planning strategies.
It is reasonably possible the unrecognized tax benefits on uncertain tax positions may change between $0.0 million and $2.0 million within the next twelve months as a result of settling tax examinations related to 2008-2011.
On December 31, 2017, the Company recognized the tax effects of the Tax Cuts and Jobs Act of 2017 (the "Tax Act”) and recorded a $0.7 million tax benefit related to the re-measurement of deferred taxes and recognition of the Alternative Minimum Tax Credit. In addition, under the Tax Act, IRC Section 163(j) was revised to limit the deduction on United States business interest expense. As a result, the Company’s ability to fully deduct interest expense may be limited in 2018. The additional information that is needed to be obtained, prepared and analyzed in order to complete the accounting requirements under ASC 740 and IRC section 163(j) will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
10. Stockholders’ Equity
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Three Months Ended March 31, 2018 (in thousands) | ||||||||||||
Foreign currency translation adjustments | Changes in derivative financial instruments | Total accumulated comprehensive income (loss) | ||||||||||
Balance as of December 31, 2017 | $ | (125 | ) | $ | (1,737 | ) | $ | (1,862 | ) | |||
Other comprehensive loss before reclassifications | (343 | ) | — | (343 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | 276 | 276 | |||||||||
Net current-period other comprehensive income (loss) | (343 | ) | 276 | (67 | ) | |||||||
Balance as of March 31, 2018 | $ | (468 | ) | $ | (1,461 | ) | $ | (1,929 | ) | |||
Three Months Ended March 31, 2017 (in thousands) | ||||||||||||
Foreign currency translation adjustments | Changes in derivative financial instruments | Total accumulated comprehensive income (loss) | ||||||||||
Balance as of December 31, 2016 | $ | (1,412 | ) | $ | (2,822 | ) | $ | (4,234 | ) | |||
Other comprehensive income before reclassifications | 219 | — | 219 | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | 267 | 267 | |||||||||
Net current-period other comprehensive income | 219 | 267 | 486 | |||||||||
Balance as of March 31, 2017 | $ | (1,193 | ) | $ | (2,555 | ) | $ | (3,748 | ) | |||
24
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Stockholders' Equity (continued)
Reclassifications From Accumulated Other Comprehensive Income (Loss)
Three Months Ended March 31, 2018 (in thousands) | ||||||
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Details about Accumulated Other Comprehensive Income Components | ||||
Interest rate contracts | $ | 276 | Interest expense | |||
Total | $ | 276 | ||||
Three Months Ended March 31, 2017 (in thousands) | ||||||
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Details about Accumulated Other Comprehensive Income Components | ||||
Interest rate contracts | $ | 267 | Interest expense | |||
Total | $ | 267 | ||||
11. Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is based on the weighted average number of shares outstanding during each period and the assumed exercise of potentially dilutive stock options and vesting of restricted stock units less the number of treasury shares assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented.
Basic and diluted income (loss) per common share from continuing operations is computed as follows (in thousands, except share and per share amounts):
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net loss from continuing operations applicable to common shares (numerator for basic and diluted calculation) | $ | (16,735 | ) | $ | (17,736 | ) | ||
Weighted average number of common shares outstanding for basic loss per share | 62,404,906 | 61,829,768 | ||||||
Weighted average number of potentially dilutive common shares outstanding | — | — | ||||||
Weighted average number of common shares outstanding for diluted loss per share | 62,404,906 | 61,829,768 | ||||||
Loss per common share from continuing operations: | ||||||||
Basic | $ | (0.27 | ) | $ | (0.29 | ) | ||
Diluted | $ | (0.27 | ) | $ | (0.29 | ) | ||
The Company has excluded shares potentially issuable under the terms of use of the securities listed below from the computation of diluted income per share, as the effect would be anti-dilutive:
Three Months Ended March 31, | ||||||
2018 | 2017 | |||||
Restricted stock and restricted stock units | 25,184 | 616,970 | ||||
25
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Segment Information
The Company has three reportable segments: Utility T&D, Canada and Oil & Gas. These segments are comprised of strategic businesses that are defined by the industries or geographic regions they serve. The Company’s Chief Operating Decision Maker evaluates segment performance using operating income which is defined as contract revenue less contract costs and segment overhead, such as amortization related to intangible assets and general and administrative expenses that are directly attributable to the segment. For additional information regarding the Company’s reportable segments, see Note 1 – Company Description and Financial Condition for more information.
The following tables reflect the Company’s operations by reportable segment for the three months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||
Utility T&D | Canada | Oil & Gas | Corporate | Eliminations | Consolidated | |||||||||||||||||||
Contract revenue | $ | 112,612 | $ | 25,803 | $ | 62,639 | $ | — | $ | (74 | ) | $ | 200,980 | |||||||||||
Contract costs | 104,305 | 24,769 | 64,294 | — | (74 | ) | 193,294 | |||||||||||||||||
Contract income (loss) | 8,307 | 1,034 | (1,655 | ) | — | — | 7,686 | |||||||||||||||||
Amortization of intangibles | 2,390 | — | 9 | — | — | 2,399 | ||||||||||||||||||
General and administrative | 4,476 | 1,813 | 2,036 | 5,150 | — | 13,475 | ||||||||||||||||||
Gain on sale of assets | (498 | ) | (75 | ) | (5,507 | ) | — | — | (6,080 | ) | ||||||||||||||
Other charges | 31 | 146 | 804 | 7,384 | — | 8,365 | ||||||||||||||||||
Operating income (loss) | $ | 1,908 | $ | (850 | ) | $ | 1,003 | $ | (12,534 | ) | $ | — | (10,473 | ) | ||||||||||
Non-operating expenses | (6,483 | ) | ||||||||||||||||||||||
Benefit for income taxes | (221 | ) | ||||||||||||||||||||||
Loss from continuing operations | (16,735 | ) | ||||||||||||||||||||||
Loss from discontinued operations net of provision for income taxes | (230 | ) | ||||||||||||||||||||||
Net loss | $ | (16,965 | ) | |||||||||||||||||||||
Three Months Ended March 31, 2017 | ||||||||||||||||||||||||
Utility T&D | Canada | Oil & Gas | Corporate | Eliminations | Consolidated | |||||||||||||||||||
Contract revenue | $ | 115,508 | $ | 25,960 | $ | 22,432 | $ | — | $ | — | $ | 163,900 | ||||||||||||
Contract costs | 107,890 | 26,786 | 27,543 | — | — | 162,219 | ||||||||||||||||||
Contract income (loss) | 7,618 | (826 | ) | (5,111 | ) | — | — | 1,681 | ||||||||||||||||
Amortization of intangibles | 2,390 | — | 27 | — | — | 2,417 | ||||||||||||||||||
General and administrative | 4,378 | 2,324 | 2,679 | 4,670 | — | 14,051 | ||||||||||||||||||
(Gain) loss on sale of assets | 66 | (269 | ) | (493 | ) | — | — | (696 | ) | |||||||||||||||
Other charges | — | 459 | 12 | 291 | — | 762 | ||||||||||||||||||
Operating income (loss) | $ | 784 | $ | (3,340 | ) | $ | (7,336 | ) | $ | (4,961 | ) | $ | — | (14,853 | ) | |||||||||
Non-operating expenses | (3,483 | ) | ||||||||||||||||||||||
Benefit for income taxes | (600 | ) | ||||||||||||||||||||||
Loss from continuing operations | (17,736 | ) | ||||||||||||||||||||||
Loss from discontinued operations net of provision for income taxes | (31 | ) | ||||||||||||||||||||||
Net loss | $ | (17,767 | ) | |||||||||||||||||||||
26
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Segment Information (continued)
Total assets by segment at March 31, 2018 and December 31, 2017 are presented below (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Utility T&D | $ | 201,902 | $ | 196,923 | ||||
Canada | 30,753 | 41,958 | ||||||
Oil & Gas | 42,512 | 50,779 | ||||||
Corporate | 73,536 | 73,893 | ||||||
Total assets, continuing operations | $ | 348,703 | $ | 363,553 | ||||
13. Contingencies, Commitments and Other Circumstances
Contingencies
Litigation and Regulatory Matters Related to the Company’s October 21, 2014 Press Release and December 4, 2014 8-K Announcing the Restatement of Condensed Consolidated Financial Statements for the Quarterly Periods Ended June 30, 2014 and March 31, 2014
After the Company announced it would be restating its Condensed Consolidated Financial Statements for the quarterly period ended June 30, 2014, a complaint was filed in the United States District Court for the Southern District of Texas (“USDC”) on October 28, 2014 seeking class action status on behalf of purchasers of the Company’s stock and alleging damages on their behalf arising from the matters that led to the restatement. The original defendants in the case were the Company, its former Chief Executive Officer, Robert R. Harl, and its former Chief Financial Officer, Van A. Welch. On January 30, 2015, the court named two employee retirement systems as Lead Plaintiffs. Lead Plaintiffs filed their consolidated complaint, captioned In re Willbros Group, Inc. Securities Litigation, on March 31, 2015, adding as a defendant John T. McNabb, II, the former Chief Executive Officer who had succeeded Mr. Harl, and claims regarding the restatement of the Company’s Condensed Consolidated Financial Statements for the quarterly period ended March 31, 2014. On June 15, 2015, Lead Plaintiffs filed a second amended consolidated complaint, seeking unspecified damages and asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Act”), based on alleged misrepresentations and omissions in the SEC filings and other public disclosures in 2014, primarily regarding internal controls, the performance of the Oil & Gas segment, compliance with debt covenants and liquidity, certain financial results and the circumstances surrounding Mr. Harl’s departure. On July 27, 2015, the Company filed a motion to dismiss the case. At a hearing on May 24, 2016, the court granted the motion to dismiss in part and denied it in part. On July 22, 2016, the Company filed an answer to the suit denying the remaining allegations in the case, which complain of alleged misrepresentations and omissions in violation of the Act regarding internal controls, the performance of the Oil & Gas segment and Mr. Harl’s departure. On June 28, 2017, Lead Plaintiffs filed a motion asking the Court to reconsider its order in 2016 dismissing certain claims and allow Lead Plaintiffs to replead two of the claims the Court has dismissed; the Company opposes the motion. The Court heard oral argument but has not ruled. On February 16, 2018, the Company reached an agreement in principle, which, if approved by the Court, would settle all claims against the defendants and be fully funded by our insurance carriers. On April 17, 2018, the Court signed Order Preliminarily Approving Settlement and Providing Notice, preliminarily approving the settlement and also scheduling, among other dates, a hearing for August 2, 2018 to determine whether the parties’ settlement is fair, reasonable and adequate to the Settlement Class Members.
In addition, two shareholder derivative lawsuits were filed purportedly on behalf of the Company in connection with the restatement. The first, Markovich v. Harl et al, was filed on November 6, 2014 in the District Court of Harris County, Texas. The second, Kumararatne v. McNabb et al, was filed on March 4, 2015 in the USDC, but was voluntarily dismissed by the plaintiff on April 23, 2015. The Markovich lawsuit named certain former officers and current and former members of the Company’s Board of Directors as defendants and the Company as a nominal defendant. The lawsuit alleged that the officer and board member defendants breached their fiduciary duties by permitting the Company’s internal controls to be inadequate, failing to prevent the restatements, and wasting corporate assets, and that the defendants were unjustly enriched. The defendants sought dismissal of the lawsuit on the grounds that the plaintiff failed to make demand upon the Company’s board to bring the lawsuit, and, on February 23, 2016, the court sustained the defendants’ motion and dismissed the lawsuit with prejudice. On March 10, 2016, the plaintiff filed a motion for reconsideration and asked the court for leave to amend its lawsuit. The court granted the plaintiff’s motion in part, allowing an amended petition, which was filed on April 18, 2016. The Plaintiff’s Second Amended Petition added Ravi Kumararatne as a plaintiff and added claims for breach of fiduciary duty against the former officers and officer and Board of Director defendants related to the departure of former Company executives, financial controls,
27
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Contingencies, Commitments and Other Circumstances (continued)
and compliance with the Company’s debt covenants. The Company sought dismissal of the amended petition on the grounds the plaintiffs failed to make a demand upon the Company’s board to bring the lawsuit. In response, plaintiffs filed a Third Amended Petition on June 24, 2016, purporting to add additional facts to support their allegations, including their allegation that they were excused from making a demand upon the board because, they claimed, such demand would be futile. Believing the claims added by plaintiffs were without merit, the Company sought to dismiss this latest pleading. After hearing argument on the motion, the court issued an order on October 24, 2016, sustaining the Company’s objections to plaintiffs’ latest pleading and again dismissed the lawsuit with prejudice. Plaintiffs’ motion for reconsideration was denied on December 21, 2016. Plaintiffs filed a Notice of Appeal on January 20, 2017. The appeal is assigned to the 14th Court of Appeals, Houston, Texas; the court heard oral argument in the appeal on January 30, 2018 but has not yet issued an opinion.
Litigation Related to Proxy
On April 11, 2018, the Company submitted for review to the SEC a preliminary proxy concerning the pending merger between the Company and Primoris. A securities class action suit was filed on April 24, 2018 by a purported stockholder in the United States District Court for the Southern District of Texas seeking injunctive relief with regards to the pending merger. The suit Karl Graulich v. Willbros Group Inc. [sic], et al., Case 4:18-cv-01286, names as defendants the Company and its directors. The suit claims that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 by filing a materially incomplete and misleading preliminary proxy statement on April 11, 2018. The complaint seeks a variety of equitable and preliminary injunctive remedies including, among other things, enjoining the consummation of the merger and awarding the plaintiff damages, costs and attorney’s fees.
The Company believes the claims in this complaint are without merit. At this time, however, it is not possible to predict the outcome of this matter or its effect on the Company or the merger. A preliminary injunction could delay or jeopardize the completion of the merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the merger. An adverse judgment for money damages could have an adverse effect on the Company.
Other
The SEC issued an order of investigation on January 29, 2015 and a subpoena on February 3, 2015, requesting information regarding the restatement of the Company’s previously issued Condensed Consolidated Financial Statements for the quarterly periods ended March 31, 2014 and June 30, 2014. The Company provided its full cooperation to the SEC, who on January 25, 2016, sent the Company a letter stating it had concluded its investigation and, based on the information it had, did not intend to recommend an enforcement action against the Company.
In addition to the matters discussed above, the Company is party to a number of other legal proceedings. Management believes that the nature and number of these proceedings are typical for a firm of similar size engaged in a similar type of business and that none of these proceedings is material to the Company’s consolidated results of operations, financial position or cash flows.
28
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Contingencies, Commitments and Other Circumstances (continued)
Commitments
From time to time, the Company enters into commercial commitments, usually in the form of commercial and standby letters of credit, surety bonds and financial guarantees. Contracts with the Company’s customers may require the Company to secure letters of credit or surety bonds to secure the Company’s performance of contracted services. In such cases, the letters of credit or bond commitments can be called upon in the event of the Company’s failure to perform contracted services. Likewise, contracts may allow the Company to issue letters of credit or surety bonds in lieu of contract retention provisions, where the client otherwise withholds a percentage of the contract value until project completion or expiration of a warranty period. Retention letters of credit or bond commitments can be called upon in the event of warranty or project completion issues, as prescribed in the contracts. The Company also issues letters of credit from time to time to secure deductible obligations under its workers compensation, automobile and general liability policies. At March 31, 2018, the Company had approximately $40.8 million of outstanding letters of credit. This amount represents the maximum amount of payments the Company could be required to make if these letters of credit are drawn upon. Additionally, the Company issues surety bonds (primarily performance in nature) that are customarily required by commercial terms on construction projects. At March 31, 2018, these bonds outstanding had a face value of $152.0 million. This amount represents the bond penalty amount of future payments the Company could be required to make if the Company fails to perform its obligations under such contracts. The performance bonds do not have a stated expiration date; rather, each is released when the Company’s performance of the contract is accepted by the customer. The Company’s maximum exposure as it relates to the value of the bonds outstanding is lowered on each bonded project as the cost to complete is reduced. As of March 31, 2018, no liability has been recognized for letters of credit or surety bonds.
Other Circumstances
The Company has the usual liability of contractors for the completion of contracts and the warranty of its work. In addition, the Company acts as prime contractor on a majority of the projects it undertakes and is normally responsible for the performance of the entire project, including subcontract work. Management is not aware of any material exposure related thereto which has not been provided for in the accompanying Condensed Consolidated Financial Statements.
29
WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Fair Value Measurements
The FASB’s standard on fair value measurements defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
The FASB’s standard on fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This standard establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
There were no transfers between levels in the first quarter of 2018 and 2017.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt obligations. The fair value estimates of the Company’s financial instruments have been determined using available market information and appropriate valuation methodologies and approximate carrying value.
Hedging Arrangements
The Company is exposed to market risk associated with changes in non-U.S. currency exchange rates. To mitigate its risk, the Company may borrow in Canadian dollars under its Canadian Facility to settle U.S. dollar account balances.
The Company attempts to negotiate contracts that provide for payment in U.S. dollars, but it may be required to take all or a portion of payment under a contract in another currency. To mitigate non-U.S. currency exchange risk, the Company seeks to match anticipated non-U.S. currency revenue with expenses in the same currency whenever possible. To the extent it is unable to match non-U.S. currency revenue with expenses in the same currency, the Company may use forward contracts, options or other common hedging techniques in the same non-U.S. currencies. The Company had no forward contracts or options at March 31, 2018 or December 31, 2017.
The Company is subject to interest rate risk on its debt and investment of cash and cash equivalents arising in the normal course of business and had previously entered into hedging arrangements to fix or otherwise limit the interest cost of its variable interest rate borrowings.
Termination of Interest Rate Swap Agreement
In August 2013, the Company entered into an interest rate swap agreement (the “Swap Agreement”) for a notional amount of $124.1 million to hedge changes in the variable rate interest expense on $124.1 million of its existing or replacement LIBOR indexed debt. The Swap Agreement was designated and qualified as a cash flow hedging instrument with the effective portion of the Swap Agreement’s change in fair value recorded in Other Comprehensive Income (“OCI”). The Swap Agreement was highly effective in offsetting changes in interest expense and no hedge ineffectiveness was recorded in the Consolidated Statements of Operations. The Swap Agreement was terminated in the third quarter of 2015 for $5.7 million, which was recorded in OCI as fair value. In the fourth quarter of 2015, the Company made an early payment of $93.6 million against its 2014 Term Loan Facility and therefore reclassified approximately $1.2 million of the fair value of the Swap Agreement from OCI to interest expense. In the first quarter of 2016, the Company made an early payment of $3.1 million against its 2014 Term Loan Facility and therefore reclassified approximately $0.1 million of the fair value of the Swap Agreement from OCI to interest expense. The remaining fair value of the Swap Agreement included in OCI will be reclassified to interest expense over the remaining life of the underlying debt with approximately $1.1 million expected to be recognized in the coming twelve months.
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WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Other Charges
The following table reflects the Company’s other charges for the three months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Legal and consulting costs (1) | $ | 7,384 | $ | 274 | ||||
Equipment and facility lease abandonment | — | (21 | ) | |||||
Employee severance costs | 946 | 344 | ||||||
Accelerated stock vesting | 35 | 165 | ||||||
Total | $ | 8,365 | $ | 762 | ||||
(1) 2018 costs are primarily associated with the Company’s evaluation of various strategic alternatives, which culminated with the signing of the Merger Agreement with Primoris. 2017 costs are associated with the restatements of the Company’s Condensed Consolidated Financial Statements for the quarterly periods ended March 31, 2014 and June 30, 2014.
Activity in the accrual related to the equipment and facility lease abandonment charges during the three months ended March 31, 2018 is as follows (in thousands):
Utility T&D | Canada | Oil & Gas | Corporate | Total | ||||||||||||||||
Accrued cost at December 31, 2017 | $ | 172 | $ | 211 | $ | 545 | $ | 2,947 | $ | 3,875 | ||||||||||
Cash payments | (29 | ) | (32 | ) | (43 | ) | (535 | ) | (639 | ) | ||||||||||
Non-cash charges (1) | — | 5 | 8 | 101 | 114 | |||||||||||||||
Change in estimates | — | — | — | — | — | |||||||||||||||
Accrued cost at March 31, 2018 | $ | 143 | $ | 184 | $ | 510 | $ | 2,513 | $ | 3,350 | ||||||||||
(1) Non-cash charges consist of accretion expense.
The Company will continue to evaluate the need for additional equipment and facility lease abandonment charges, including the adequacy of its existing accrual, as conditions warrant.
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WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Discontinued Operations
The following disposals qualify for discontinued operations treatment under ASU 2014-08, which the Company adopted on January 1, 2015.
Professional Services
On November 30, 2015, the Company sold the balance of its Professional Services segment to TRC Companies (“TRC”) for $130.0 million in cash, subject to working capital and other adjustments. At closing, TRC held back $7.5 million from the purchase price (the “Holdback Amount”) until the Company effects the novation of a customer contract from one of the subsidiaries sold in the transaction to the Company (or obtains written approval of a subcontract of all the work that is the subject of such contract) and obtains certain consents. If such novation, subcontract or consents were not approved by March 15, 2016, TRC would pay the Holdback Amount to the Company. In connection with this transaction, the Company recorded a gain on sale of $97.0 million during the year ended December 31, 2015.
During the year ended December 31, 2016, the Company reached an agreement with TRC on substantially all of the outstanding items related to the sale of the Professional Services segment. As a result, the Company received $4.6 million during the year ended December 31, 2016 in relation to the sale and inclusive of the final settlement of working capital and the Holdback Amount and recorded $2.5 million in charges against the original gain on sale in relation to working capital and other post-closing adjustments.
Certain assets and liabilities associated with one Professional Services contract were retained by the Company and have been excluded from the transaction.
In 2015, and prior to the sale of the balance of the Professional Services segment, the Company sold the following three subsidiaries that were historically part of the Professional Services segment.
Downstream Professional Services
On June 12, 2015, the Company sold all of its issued and outstanding equity of Downstream Professional Services to BR Engineers, LLC for approximately $10.0 million in cash. In connection with this transaction, the Company recorded a loss on sale of $2.2 million during the year ended December 31, 2015.
Premier
On March 31, 2015, the Company sold all of its membership units in Premier to USIC Locating Services, LLC for approximately $51.0 million in cash, of which $4.0 million was deposited into an escrow account for a period of up to eighteen months to cover post-closing adjustments and any indemnification obligations of the Company. In connection with this transaction, the Company recorded a gain on sale of $37.1 million during the year ended December 31, 2015. The Company received $3.7 million as full and final settlement of the outstanding escrow amount during the year ended December 31, 2016.
UtilX
On March 17, 2015, the Company sold all of its equity interests of UtilX to Novinium, Inc. for approximately $40.0 million in cash, of which $0.5 million was deposited into an escrow account for a period of six months to cover post-closing adjustments and any indemnification obligations of the Company. In the third quarter of 2015, the Company cleared the $0.5 million amount recorded in the escrow account as a post-closing adjustment. As a result of this transaction, the Company recorded a gain on sale of $20.3 million during the year ended December 31, 2015.
Hawkeye
In the fourth quarter of 2013, the Company sold certain assets comprising its Hawkeye business to Elecnor Hawkeye,
LLC, a subsidiary of Elecnor, Inc.
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WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Discontinued Operations (continued)
Results of Discontinued Operations
Condensed Statements of Operations with respect to discontinued operations are as follows (in thousands) and are primarily related to the Professional Services segment:
Three Months Ended March 31, 2018 | ||||||||||||
Professional Services | Hawkeye | Total | ||||||||||
Contract revenue | $ | 13 | $ | — | $ | 13 | ||||||
Contract costs | 78 | — | 78 | |||||||||
General and administrative | 134 | 25 | 159 | |||||||||
Other charges | 6 | — | 6 | |||||||||
Operating loss | (205 | ) | (25 | ) | (230 | ) | ||||||
Non-operating expenses | — | — | — | |||||||||
Pre-tax loss | (205 | ) | (25 | ) | (230 | ) | ||||||
Provision for income taxes | — | — | — | |||||||||
Loss from discontinued operations | $ | (205 | ) | $ | (25 | ) | $ | (230 | ) | |||
Three Months Ended March 31, 2017 | ||||||||||||
Professional Services | Hawkeye | Total | ||||||||||
Contract revenue | $ | 679 | $ | — | $ | 679 | ||||||
Contract costs | 238 | — | 238 | |||||||||
General and administrative | 472 | — | 472 | |||||||||
Operating loss | (31 | ) | — | (31 | ) | |||||||
Non-operating expenses | — | — | — | |||||||||
Pre-tax loss | (31 | ) | — | (31 | ) | |||||||
Provision for income taxes | — | — | — | |||||||||
Loss from discontinued operations | $ | (31 | ) | $ | — | $ | (31 | ) | ||||
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WILLBROS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Discontinued Operations (continued)
Condensed Balance Sheets with respect to discontinued operations are as follows (in thousands):
March 31, 2018 | ||||||||||||
Professional Services | Hawkeye | Total | ||||||||||
Accounts receivable, net | $ | 336 | $ | — | $ | 336 | ||||||
Total assets associated with discontinued operations | 336 | — | 336 | |||||||||
Accounts payable and accrued liabilities | 6 | 520 | 526 | |||||||||
Other current liabilities | 502 | — | 502 | |||||||||
Other long-term liabilities | 794 | — | 794 | |||||||||
Total liabilities associated with discontinued operations | 1,302 | 520 | 1,822 | |||||||||
Net liabilities associated with discontinued operations | $ | (966 | ) | $ | (520 | ) | $ | (1,486 | ) | |||
December 31, 2017 | ||||||||||||
Professional Services | Hawkeye | Total | ||||||||||
Contract cost and recognized income not yet billed | $ | 324 | $ | — | $ | 324 | ||||||
Total assets associated with discontinued operations | 324 | — | 324 | |||||||||
Accounts payable and accrued liabilities | 337 | 180 | 517 | |||||||||
Other current liabilities | 574 | — | 574 | |||||||||
Other long-term liabilities | 893 | — | 893 | |||||||||
Total liabilities associated with discontinued operations | 1,804 | 180 | 1,984 | |||||||||
Net liabilities associated with discontinued operations | $ | (1,480 | ) | $ | (180 | ) | $ | (1,660 | ) | |||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2018 and 2017, included in Item 1 of Part I of this Form 10-Q, and the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
OVERVIEW
Company Description
Willbros is a specialty energy infrastructure contractor serving the power and oil and gas industries with offerings that primarily include construction, maintenance and facilities development services. Our principal markets for continuing operations are the United States and Canada. We obtain our work through competitive bidding and negotiations with prospective clients. Contract values range from several thousand dollars to several hundred million dollars, and contract durations range from a few weeks to more than two years.
Business Segments
Willbros has three reportable segments: Utility T&D, Canada and Oil & Gas. These segments are comprised of strategic businesses that are defined by the industries or geographic regions they serve. Our Chief Operating Decision Maker evaluates segment performance using operating income which is defined as contract revenue less contract costs and segment overhead, such as amortization related to intangible assets and general and administrative expenses that are directly attributable to the segment
Our Utility T&D segment provides a wide range of services in electric and natural gas transmission and distribution, including comprehensive engineering, procurement, maintenance and construction, repair and restoration of utility infrastructure. These services include engineering, design, installation, maintenance, procurement and repair of electrical transmission, distribution, substation, wireless and gas distribution systems. Our Utility T&D segment conducts projects ranging from small engineering and consulting projects to multi-million dollar turnkey distribution, substation and transmission line projects, including those required for renewable energy facilities.
Our Canada segment provides construction, maintenance and fabrication services, including integrity and supporting civil work, pipeline construction, general mechanical and facility construction, American Petroleum Institute (“API”) storage tanks, general and modular fabrication, along with electrical and instrumentation projects serving the Canadian energy and water industries.
Our Oil & Gas segment provides construction, maintenance and lifecycle extension services to the midstream markets. These services include facilities construction such as tank terminals, pump stations, flow stations, gas compressor stations and metering stations, as well as small-diameter midstream pipeline construction, integrity construction and system maintenance.
On January 2, 2018, we sold our tank services business, which was historically included in our Oil & Gas segment, to ATS Group, Inc. (“ATS”) for a $3.0 million purchase price subject to working capital and other adjustments. In connection with this transaction, we received $2.5 million of cash proceeds and recorded a gain on sale of $1.0 million, which is included in the line item “Gain on sale of assets” in our Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. See Note 5 – Assets Held for Sale included in Item 1 of Part I of this Form 10-Q for more information.
On January 9, 2018, we entered into an Asset Purchase Agreement to sell assets comprising our mainline pipeline construction business (the “Asset Purchase Agreement”), which was historically included in our Oil & Gas segment, to WB Pipeline, LLC, an affiliate of Meridien Energy, LLC. (“Meridien”). For more information, see the subsection “Sale of Mainline Pipeline Construction Business” below.
Merger Agreement
On March 27, 2018, we entered into an Agreement and Plan of Merger (“the Merger Agreement”) with Primoris Services Corporation (“Primoris”) and Waco Acquisition Vehicle, Inc., a wholly-owned subsidiary of Primoris (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will be merged into us, and we will become a wholly owned subsidiary of Primoris. The Merger Agreement includes customary representations, warranties and covenants. Primoris will pay $0.60 per share for all of our outstanding common stock. The Merger Agreement is expected to close in the second quarter of 2018, subject to satisfaction of customary closing conditions, including approval of the Merger Agreement by the requisite vote of our
35
stockholders. Upon termination of the Merger Agreement in certain circumstances, we are obligated to pay Primoris a termination fee of $4.3 million and, in certain other circumstances, a termination fee of $8.0 million.
Term Forbearance Agreement
On March 27, 2018, we entered into a Forbearance Agreement (the “Term Forbearance Agreement”) with the lenders under the 2014 Term Credit Agreement (the “Term Lenders”). Under the Term Forbearance Agreement, the Term Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Term Credit Agreement with respect to certain defaults and events of default (the “Term Specified Defaults”). The Term Forbearance Agreement is effective until the earliest of (i) August 15, 2018 or the closing of the Merger Agreement or (ii) the occurrence of any one of several specified termination events including, among other things, the termination of the Merger Agreement (the “Term Forbearance Period”). Upon expiration of the Term Forbearance Agreement or if we were to default under the Term Forbearance Agreement or the 2014 Term Credit Agreement, other than Term Specified Defaults, the Term Lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Term Credit Agreement.
ABL Forbearance Agreement
On March 27, 2018, we entered into a Limited Forbearance Agreement (the “ABL Forbearance Agreement”) with the lenders under the 2013 ABL Credit Facility (the “ABL Lenders”). Under the ABL Forbearance Agreement, the ABL Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2013 ABL Credit Facility with respect to certain defaults and events of default (the “ABL Specified Defaults”). The ABL Forbearance Agreement is effective until the earliest of (i) July 31, 2018 or the closing of the Merger Agreement or (ii) the occurrence of any one of several specified termination events including, among other things, the termination of the Merger Agreement (the “ABL Forbearance Period”). Upon expiration of the ABL Forbearance Agreement or if we were to default under the ABL Forbearance Agreement or the 2013 ABL Credit Facility, other than ABL Specified Defaults, the ABL Lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2013 ABL Credit Facility.
Seventh Amendment to the 2014 Term Credit Agreement
On March 27, 2018, we amended the 2014 Term Credit Agreement pursuant to a Seventh Amendment among Willbros Group, Inc., as borrower, the guarantors from time to time party thereto, Primoris as initial first-out lender, the lenders from time to time party thereto and Cortland Capital Market Services LLC, as administrative agent (the “Seventh Amendment”). Under the terms of the Seventh Amendment, Primoris provided us with an additional term loan in an amount equal to $10.0 million (the “Initial First-Out Loan”) that was drawn in full on March 30, 2018 and bears the same maturity date as the aggregate outstanding principal balance of our 2014 Term Loan Facility.
In addition, under the terms of the Seventh Amendment, Primoris may provide us with additional term loans in an aggregate amount not to exceed $10.0 million (the “Additional First-Out Loans”). Interest payable with respect to the Initial First-Out Loan and any Additional First-Out Loans will be paid in-kind through additions to the principal amount of such loans.
The Seventh Amendment further provides that, until the termination of the Term Forbearance Period, the due date of any payments due and owing to the lenders (other than Primoris) under the 2014 Term Credit Agreement will be deferred until the fifth business day after the date of the termination of the Term Forbearance Period. In addition, the Seventh Amendment provides that the payment by the borrower of an amount equal to $100.0 million plus the expenses of the administrative agent in an amount not to exceed $1.1 million shall constitute payment in full and satisfaction and discharge of all obligations of the borrower and the other loan parties under the 2014 Term Credit Agreement, but solely if such payment is made in connection with the consummation of the merger.
Going Concern
In 2017, we incurred significant operating losses, cash outflows from operating activities and a net working capital deficiency. These significant operating losses continued to generate negative cash outflows in the first quarter of 2018. We are not in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the quarterly period ended March 31, 2018 and do not expect to be in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the 2014 Term Credit Agreement for the next twelve months, primarily due to these significant operating losses. In addition, we are currently not in compliance with certain other provisions under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, which expires on August 7, 2018. Absent the temporary forbearance provided under the Term Forbearance Agreement and the ABL Forbearance Agreement, all of our debt obligations would become due under the default provisions in the 2014 Term Credit Agreement and the 2013 ABL Credit Facility. In addition, these significant operating losses and cash outflows have put a considerable strain on our overall liquidity. Although the Seventh Amendment provides us with
36
additional short-term liquidity for the period between the signing of the Merger Agreement and the completion of the merger, we can provide no assurance that the merger will be completed. If we are unable to complete the merger, we will likely need to explore other strategic alternatives, which could include seeking protection under the U.S. Bankruptcy laws.
Our continuing failure to comply with financial covenants and other covenants, our inability to extend or refinance the 2013 ABL Credit Facility and our continuing liquidity issues raise substantial doubt about our ability to continue as a going concern, notwithstanding the temporary forbearance provided under the Term Forbearance Agreement and the ABL Forbearance Agreement and the short-term liquidity provided by the Seventh Amendment.
In consideration of the above facts and circumstances, at March 31, 2018, we have classified all of our debt obligations as current, which has caused our current liabilities to far exceed our current assets since such date. These debt obligations, net of unamortized discount and debt issuance costs, approximate $139.9 million at March 31, 2018.
Sale of Mainline Pipeline Construction Business
On January 9, 2018, we entered into an Asset Purchase Agreement to sell assets comprising our mainline pipeline construction business to Meridien. The Asset Purchase Agreement, among other things, states that funding will occur in various stages in 2018 and in conjunction with the completed valuation of the assets and final approval by Meridien.
In connection with the Asset Purchase Agreement, we recorded a gain on sale of $4.4 million, which is included in the line item “Gain on sale of assets” in our Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. The remaining assets associated with the Asset Purchase Agreement are classified as “Assets held for sale” in our Condensed Consolidated Balance Sheet at March 31, 2018. See Note 5 – Assets Held for Sale included in Item 1 of Part I of this Form 10-Q for more information.
In addition, as part of the Asset Purchase Agreement, we retained the three mainline pipeline construction projects associated with our mainline pipeline construction business through completion. Two of these projects have reached mechanical completion with an existing letter of credit returned in the first quarter of 2018. The remaining right-of-way restoration and other clean-up activities associated with these projects are expected to be completed by the end of the third quarter of 2018.
With respect to the remaining mainline pipeline construction project, in the first quarter of 2018, we reached an agreement with the customer to mutually conclude the remaining work. In addition, the agreement releases us from further liability at the completion of the project. As such, we have withdrawn and released any outstanding change orders or claims associated with the project.
Other Financial Measures
Adjusted EBITDA from Continuing Operations
We define Adjusted EBITDA from continuing operations as income (loss) from continuing operations before interest expense (income), income tax expense (benefit) and depreciation and amortization, adjusted for items which management does not consider representative of our ongoing operations and certain non-cash items of the Company. These adjustments are itemized in the following table. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA from continuing operations, you should be aware that in the future we may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. Our presentation of Adjusted EBITDA from continuing operations should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Management uses Adjusted EBITDA from continuing operations as a supplemental performance measure for:
• | Comparing normalized operating results with corresponding historical periods and with the operational performance of other companies in our industry; and |
• | Presentations made to analysts, investment banks and other members of the financial community who use this information in order to make investment decisions about us. |
Adjusted EBITDA from continuing operations is not a financial measurement recognized under U.S. generally accepted accounting principles, or U.S. GAAP. When analyzing our operating performance, investors should use Adjusted EBITDA from continuing operations in addition to, and not as an alternative for, net income, operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Because not all companies use identical calculations, our presentation of Adjusted EBITDA from continuing operations may be different from similarly titled measures of other companies.
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A reconciliation of Adjusted EBITDA from continuing operations to U.S. GAAP financial information follows (in thousands):
Three Months Ended | ||||||||
March 31, 2018 | March 31, 2017 | |||||||
Loss from continuing operations | $ | (16,735 | ) | $ | (17,736 | ) | ||
Interest expense | 6,528 | 3,488 | ||||||
Interest income | (8 | ) | (8 | ) | ||||
Benefit for income taxes | (221 | ) | (600 | ) | ||||
Depreciation and amortization | 4,315 | 5,037 | ||||||
EBITDA from continuing operations | (6,121 | ) | (9,819 | ) | ||||
Stock based compensation | 524 | 906 | ||||||
Legal and consulting costs (1) | 7,384 | 274 | ||||||
Restructuring related costs | 946 | 323 | ||||||
Gain on sale of assets | (6,080 | ) | (696 | ) | ||||
Adjusted EBITDA from continuing operations | $ | (3,347 | ) | $ | (9,012 | ) | ||
(1) 2018 costs are primarily associated with the Company’s evaluation of various strategic alternatives, which culminated with the signing of the Merger Agreement with Primoris. 2017 costs are associated with the restatements of the Company’s Condensed Consolidated Financial Statements for the quarterly periods ended March 31, 2014 and June 30, 2014.
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Backlog
Backlog broadly consists of anticipated revenue from the uncompleted portions of existing contracts and contracts whose award is reasonably assured, subject only to the cancellation and modification provisions contained in various contracts. Additionally, due to the short duration of many jobs, revenue associated with jobs won and performed within a reporting period will not be reflected in quarterly backlog reports. We generate revenue from numerous sources, including contracts of long or short duration entered into during a year as well as from various contractual processes, including change orders, extra work and variations in the scope of work. These revenue sources are not added to backlog until realization is assured.
Our backlog presentation reflects not only the 12-month lump sum and work under a Master Service Agreement (“MSA”) but also the full-term value of work under contract, including MSA work, as we believe that this information is helpful in providing additional long-term visibility. We determine the amount of backlog for work under ongoing MSA maintenance and construction contracts by using recurring historical trends inherent in the MSAs, factoring in seasonal demand and projecting customer needs based upon ongoing communications with the customer.
At March 31, 2018, 12-month backlog was $425.3 million, which is a decrease of $51.9 million compared to December 31, 2017. The overall decrease is related to the work-off of existing discrete contracts in our Oil & Gas segment partially offset by increases in our Utility T&D and Canada segments.
At March 31, 2018, total backlog was $635.4 million, which is an increase of $19.0 million compared to December 31, 2017. The increase is primarily related to the March 5, 2018 extension of our agreement with Oncor for one year, which significantly increased total MSA backlog associated with our Utility T&D segment. The overall increase in total backlog was partially offset by the work-off of existing discrete contracts in our Oil & Gas segment.
Approximately $9.1 million and $20.7 million of 12-month and total backlog at March 31, 2018 and December 31, 2017, respectively, is attributed to our mainline pipeline construction business in our Oil & Gas segment. On January 9, 2018, we entered into an agreement to sell assets comprising our mainline pipeline construction business to Meridien. See the discussion under the caption “Sale of Mainline Pipeline Construction Business” for more information.
Approximately $1.3 million and $18.3 million of 12-month and total backlog at March 31, 2018 and December 31, 2017, respectively, is attributed to our tank services business in our Oil & Gas segment. On January 2, 2018, we sold our tank services business to ATS. See Note 5 – Assets Held for Sale for more information.
The following tables show our 12-month and total backlog (in thousands) by operating segment and type of contract as of March 31, 2018 and December 31, 2017:
12-Month Backlog | ||||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
MSA | Discrete Contract | 12-Month | MSA | Discrete Contract | 12-Month | |||||||||||||||||||
Utility T&D | $ | 294,073 | $ | 27,058 | $ | 321,131 | $ | 285,759 | $ | 21,363 | $ | 307,122 | ||||||||||||
Canada | 46,629 | 8,452 | 55,081 | 45,759 | 5,955 | 51,714 | ||||||||||||||||||
Oil & Gas | — | 49,042 | 49,042 | — | 118,278 | 118,278 | ||||||||||||||||||
12-Month Backlog | $ | 340,702 | $ | 84,552 | $ | 425,254 | $ | 331,518 | $ | 145,596 | $ | 477,114 | ||||||||||||
Total Backlog | ||||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
MSA | Discrete Contract | Total | MSA | Discrete Contract | Total | |||||||||||||||||||
Utility T&D | $ | 460,791 | $ | 28,560 | $ | 489,351 | $ | 350,107 | $ | 37,177 | $ | 387,284 | ||||||||||||
Canada | 88,518 | 8,452 | 96,970 | 104,815 | 5,955 | 110,770 | ||||||||||||||||||
Oil & Gas | — | 49,042 | 49,042 | — | 118,278 | 118,278 | ||||||||||||||||||
Total Backlog | $ | 549,309 | $ | 86,054 | $ | 635,363 | $ | 454,922 | $ | 161,410 | $ | 616,332 | ||||||||||||
At March 31, 2018, we had remaining performance obligations (“RPOs”) of $340.7 million, which included $254.6 million of work under MSAs where we have obtained a signed purchase order or minimum work commitment and $86.1 million in discrete projects under contract.
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We have excluded from our RPOs approximately $294.7 million of additional estimated work under MSAs. This amount, which is included in our total backlog at March 31, 2018, is estimated based on recurring historical trends inherent in the MSAs and does not have a signed purchase order or minimum work commitment. For additional information regarding the Company’s backlog, see Note 4 – Revenue included in Item 1 of Part I of this Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In our Annual Report on Form 10-K for the year ended December 31, 2017, we identified and disclosed our significant accounting policies. Subsequent to December 31, 2017, there has been no change to our significant accounting policies.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017
(in thousands)
2018 | 2017 | Change | ||||||||||
Contract revenue | ||||||||||||
Utility T&D | $ | 112,612 | $ | 115,508 | $ | (2,896 | ) | |||||
Canada | 25,803 | 25,960 | (157 | ) | ||||||||
Oil & Gas | 62,639 | 22,432 | 40,207 | |||||||||
Eliminations | (74 | ) | — | (74 | ) | |||||||
Total | 200,980 | 163,900 | 37,080 | |||||||||
Contract costs | 193,294 | 162,219 | 31,075 | |||||||||
Contract income | 7,686 | 1,681 | 6,005 | |||||||||
Amortization of intangibles | 2,399 | 2,417 | (18 | ) | ||||||||
General and administrative | 13,475 | 14,051 | (576 | ) | ||||||||
Gain on sale of assets | (6,080 | ) | (696 | ) | (5,384 | ) | ||||||
Other charges | 8,365 | 762 | 7,603 | |||||||||
Operating income (loss) | ||||||||||||
Utility T&D | 1,908 | 784 | 1,124 | |||||||||
Canada | (850 | ) | (3,340 | ) | 2,490 | |||||||
Oil & Gas | 1,003 | (7,336 | ) | 8,339 | ||||||||
Corporate | (12,534 | ) | (4,961 | ) | (7,573 | ) | ||||||
Total | (10,473 | ) | (14,853 | ) | 4,380 | |||||||
Non-operating expenses | (6,483 | ) | (3,483 | ) | (3,000 | ) | ||||||
Loss from continuing operations before income taxes | (16,956 | ) | (18,336 | ) | 1,380 | |||||||
Benefit for income taxes | (221 | ) | (600 | ) | 379 | |||||||
Loss from continuing operations | (16,735 | ) | (17,736 | ) | 1,001 | |||||||
Loss from discontinued operations net of provision for income taxes | (230 | ) | (31 | ) | (199 | ) | ||||||
Net loss | $ | (16,965 | ) | $ | (17,767 | ) | $ | 802 | ||||
Consolidated Results
Contract Revenue
Contract revenue increased $37.1 million in the first quarter of 2018 primarily driven by significant growth in large discrete projects in our facilities construction services in our Oil & Gas segment in comparison to the first quarter of 2017. The overall increase in contract revenue was partially offset by a small decrease in contract revenue in our Utility T&D segment primarily driven by a reduction in storm restoration work in the first quarter of 2018.
Contract Income
Contract income increased $6.0 million in the first quarter of 2018 as contract margin was 3.8 percent compared to 1.0 percent in the first quarter of 2017. The increase in contract income and related margin is primarily driven by a reduction of losses associated with our mainline pipeline and integrity construction services in the Oil & Gas segment. The overall increase in contract income and related margin is also partly attributed to increased margins in our fabrication services and maintenance projects in our Canada segment, improved productivity in our electric transmission construction services in Texas in our Utility T&D segment and improved utilization of equipment in both our Utility T&D and Oil & Gas segments.
Amortization of Intangibles
We recorded $2.4 million of intangible amortization expense in the first quarter of 2018 primarily related to the amortization of customer relationship and trademark intangibles associated with our Utility T&D segment. The small decrease from the first quarter of 2017 is related to the lack of intangible amortization associated with our mainline pipeline business in our Oil & Gas segment. On January 9, 2018, we signed an agreement to sell assets comprising our mainline construction business to Meridien and therefore disposed of the related intangible asset.
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General and Administrative Expenses
General and administrative expenses decreased $0.6 million in the first quarter of 2018. The decrease is primarily driven by headcount reductions in our Oil & Gas segment. These headcount reductions were mainly within the segment’s tank services business, which was sold in the first quarter of 2018 and the mainline pipeline construction business, which is in the process of completing its remaining projects.
Gain on Sale of Assets
We recorded $6.1 million of gains on the sale of assets in the first quarter of 2018, which is an increase of $5.4 million in comparison to the first quarter of 2017. The increase is primarily driven by a $4.4 million gain on sale of assets comprising our mainline pipeline construction business as well as a $1.0 million gain on the sale of assets comprising our tank services business.
Other Charges
We recorded other charges of $8.4 million in the first quarter of 2018 primarily related to costs associated with our evaluation of various strategic alternatives, which culminated with the signing of the Merger Agreement with Primoris. The $7.6 million increase in other charges in the first quarter of 2018 is primarily driven by an increase in these types of costs in comparison to the first quarter of 2017.
Operating Loss
Operating loss decreased $4.4 million in the first quarter of 2018 primarily driven by the gains on the sale of assets associated with our mainline pipeline construction business and our tank services business as well as an increase in contract income and related margin discussed above. The decreased operating loss is partially offset by an increase in other charges mainly due to increased costs in the first quarter of 2018 associated with our evaluation of various strategic alternatives, which culminated with the signing of the Merger Agreement with Primoris.
Non-Operating Expenses
Non-operating expenses increased $3.0 million in the first quarter of 2018 primarily driven by an increase in interest expense associated with the 2014 Term Loan Facility related to an increased interest rate in conjunction with the Sixth Amendment to the 2014 Term Credit Agreement as well as an increase in interest expense attributed to higher indebtedness under the 2013 ABL Credit Facility in comparison to the first quarter of 2017. The increase in non-operating expenses is also partly attributed to increases in the amortization of debt issuance costs and the amortization of the repayment fee, both associated with the 2014 Term Loan Facility. The increase in non-operating expenses is also partly attributed to the unfavorable settlement of a contract dispute with a customer, which resulted in additional interest expense in the first quarter of 2018.
Benefit for Income Taxes
Benefit for income taxes decreased $0.4 million in the first quarter of 2018 primarily driven by a first quarter of 2017 refundable alternative minimum tax credit carry-forward that did not recur in the first quarter of 2018.
Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations increased $0.2 million in the first quarter of 2018 primarily driven by the first quarter of 2018 close-out of certain projects associated with previously disposed businesses.
Segment Results
Utility T&D Segment
Contract revenue decreased $2.9 million in the first quarter of 2018 primarily driven by a reduction of storm restoration work associated with our electric transmission construction services in Texas and a decreased volume of work in our distribution services in the East Coast in comparison to the first quarter of 2017. The overall decrease in contract revenue is partially offset by growth in our distribution services in the Southeast in the first quarter of 2018.
Operating income increased $1.1 million in the first quarter of 2018 primarily driven by improved margins in our electric transmission construction services in comparison to the first quarter of 2017. These improvements were mainly due to an overall improvement in productivity of services performed and an increase in the utilization of equipment. The overall increase in operating income is also partly attributed to margin improvement in our distribution services in the Southeast mainly due to revenue growth previously discussed. The overall increase in operating income is also partly attributed to increased gains on the sale of assets in the first quarter of 2018. The overall increase in operating income is partially offset with margin deterioration in our distribution services in the East Coast mainly due to a reduction in volume previously discussed, as well as a change in the mix of work in comparison to the first quarter of 2017.
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Canada Segment
Contract revenue remained relatively flat in the first quarter of 2018, decreasing $0.2 million in comparison to the first quarter of 2017. The decrease is primarily driven by a decrease in our cross-country pipeline services and other capital projects in the first quarter of 2018. The overall decrease in contract revenue is partially offset with an increase in maintenance projects, as well as fabrication services, in the first quarter of 2018.
Operating loss decreased $2.5 million in the first quarter of 2018 primarily driven by increased margins in fabrication services and maintenance projects, as a result of higher maintenance volumes and specialty fabrication projects. The overall decrease in operating loss is also partly attributed to a reduction of loss projects, as well as a reduction in employee severance costs in comparison to the first quarter of 2017.
Oil & Gas Segment
Contract revenue increased $40.2 million in the first quarter of 2018 primarily driven by significant growth in large discrete projects in our facilities construction services, coupled with a small increase in volume associated with our mainline pipeline construction services. On January 9, 2018, we signed an agreement to sell assets comprising our mainline construction business to Meridien. The overall increase to revenue was partially offset with a decrease in our tank services business, which was sold on January 2, 2018.
Operating income increased $8.3 million in the first quarter of 2018 to $1.0 million primarily driven by a $4.4 million gain on the sale of assets comprising our mainline pipeline construction business as well as a $1.0 million gain on the sale of assets comprising our tank services business. The overall increase in operating income is also partly attributed to a reduction of losses associated with our mainline pipeline and integrity construction services, as well as an increase in the utilization of equipment in comparison to the first quarter of 2017.
Corporate
Corporate costs represent overhead costs, such as executive management, public company, accounting, tax and professional services, human resources and treasury, that are not directly related to the operations of the segments. The $7.6 million increase in corporate costs in the first quarter of 2018 is primarily driven by costs associated with our evaluation of various strategic alternatives, which culminated with the signing of the Merger Agreement with Primoris.
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LIQUIDITY AND CAPITAL RESOURCES
2014 Term Loan Facility
On December 15, 2014, we entered into the 2014 Term Credit Agreement among Willbros Group, Inc., certain of its subsidiaries, as guarantors, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. Cortland Capital Market Services LLC currently serves as administrative agent under the 2014 Term Credit Agreement.
Principal, Interest and Maturity
The 2014 Term Credit Agreement initially provided for a five-year $270.0 million term loan facility (the “2014 Term Loan Facility”), which we drew in full on the effective date of the 2014 Term Credit Agreement. Effective November 6, 2017, we amended the 2014 Term Credit Agreement pursuant to a Sixth Amendment (the “Sixth Amendment”). The Sixth Amendment, among other things, provides for an additional term loan in an amount equal to $15.0 million, which is pari passu in right of payment with, and secured on a pari passu basis with the aggregate outstanding principal balance of the 2014 Term Loan Facility. The additional term loan was drawn in full on November 17, 2017 (the “Sixth Amendment Funding Date”) and bears the same maturity date as the aggregate outstanding principal balance of the 2014 Term Loan Facility. At March 31, 2018, the aggregate outstanding principal balance of the 2014 Term Loan Facility was approximately $107.2 million.
The 2014 Term Loan Facility initially bore interest at the “Adjusted Base Rate” plus an applicable margin of 8.75 percent, or the “Eurodollar Rate” plus an applicable margin of 9.75 percent. On the Sixth Amendment Funding Date, the interest rate increased to 13 percent, consisting of an applicable margin of 11.75 percent for Eurodollar Rate loans plus a LIBOR floor of 1.25 percent. The interest rate in effect at March 31, 2018 and December 31, 2017 was 13 percent. Beginning September 30, 2018, the applicable margin will increase an additional 100 basis points each quarterly period until maturity.
On March 27, 2018, we amended the 2014 Term Credit Agreement pursuant to the Seventh Amendment. Under the terms of the Seventh Amendment, Primoris provided us with an Initial First-Out Loan in an amount equal to $10.0 million that was drawn in full on March 30, 2018 and bears the same maturity date as the aggregate outstanding principal balance of our 2014 Term Loan Facility. In addition, Primoris may provide us with Additional First-Out Loans up to $10.0 million. See Note 1 – Company Description and Financial Condition included in Item 1 of Part I of this Form 10-Q for more information.
Makewhole
Under the 2014 Term Credit Agreement, with respect to prepayments made from inception of the Term Loan through March 31, 2018, we have not been required to pay prepayment premiums in respect of the “makewhole amount.” However, future prepayments or refinancing of the balance of the 2014 Term Loan Facility may require us to pay a prepayment premium equal to the makewhole amount and the repayment fee described below. Pursuant to the Sixth Amendment and beginning with the Sixth Amendment Funding Date, if a prepayment is made on or before September 30, 2018, the makewhole amount will be calculated as the present value of all interest payments that would have been made on the amount prepaid from the date of the prepayment to June 15, 2019 at a rate per annum equal to the sum of the applicable margin on the date of the prepayment plus the greater of 1.25 percent and the Eurodollar rate in effect on the date of the repayment. If a prepayment is made after September 30, 2018, the makewhole amount will be calculated as the present value of all interest payments that would have been made on the amount prepaid from the date of the prepayment to December 15, 2019 at a rate per annum equal to the sum of the applicable margin on the date of the prepayment plus the greater of 1.25 percent and the Eurodollar rate in effect on the date of the repayment.
Should a prepayment in full occur under the Sixth Amendment, the estimated makewhole amount due at future prepayment dates would be as follows (in thousands):
June 30, 2018 | September 30, 2018 | December 31, 2018 | March 31, 2019 | June 30, 2019 | September 30, 2019 | |||||||||||||||||||
Makewhole | $ | 13,358 | $ | 9,874 | $ | 16,888 | $ | 12,331 | $ | 7,595 | $ | 3,350 | ||||||||||||
Repayment Fee
Prior to the Sixth Amendment, we were also required to pay a repayment fee on the date of any prepayment and on the maturity date of the 2014 Term Loan Facility equal to a total of $4.6 million, which was 5.0 percent of the amount prepaid or 5.0 percent of the aggregate remaining outstanding principal balance on the maturity date. Pursuant to the Sixth Amendment and beginning with the Sixth Amendment Funding Date, the repayment fee increased to a total of $9.7 million, which is 9.0 percent of the amount prepaid or 9.0 percent of the aggregate remaining outstanding principal balance on the maturity date. We are amortizing the repayment fee as a discount, from that date through the maturity date of the 2014 Term Loan Facility, using the
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effective interest method. The unamortized amount of the repayment fee was $6.2 million and $7.2 million at March 31, 2018 and December 31, 2017, respectively, based on the 9.0 percent repayment fee in effect as of those dates.
Term Loan Discounted Payoff
The Seventh Amendment provides that the payment by the borrower of an amount equal to $100.0 million plus the expenses of the administrative agent in an amount not to exceed $1.1 million shall constitute payment in full and satisfaction and discharge of all obligations of the borrower and the other loan parties under the 2014 Term Credit Agreement, but solely if such payment is made in connection with the consummation of the merger. Accordingly, if the 2014 Term Loan Facility is paid off in connection with the closing of the merger, no amounts will be owed in respect of the makewhole amount and the repayment fee. Based on the above information, the settlement of the debt at the discounted amount is considered a troubled debt restructuring transaction. However, given the settlement of the debt at the discounted amount is contingent upon the consummation of the merger, we have not recorded an adjustment to our Condensed Consolidated Financial Statements.
Debt Covenants
On March 31, 2015 (the “First Amendment Closing Date”), March 1, 2016, July 26, 2016 and March 3, 2017, the Company amended the 2014 Term Credit Agreement pursuant to a First Amendment (the “First Amendment”), a Third Amendment, a Fourth Amendment and a Fifth Amendment (the “Fifth Amendment”). These amendments, among other things, suspended the calculation of the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the period from December 31, 2014 through June 30, 2017 (the “Covenant Suspension Periods”) so that any failure by us to comply with the Maximum Total Leverage Ratio or Minimum Interest Coverage Ratio during the Covenant Suspension Periods shall not be deemed to result in a default or event of default.
In consideration of the initial suspension of the calculation of the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the First Amendment, we issued 10.1 million shares, which was equivalent to 19.9 percent of the then outstanding shares of common stock immediately prior to the First Amendment Closing Date, to KKR Lending Partners II L.P. and other entities indirectly advised by KKR Credit Advisers (US) LLC, which made them a related party. In connection with this transaction, we recorded debt covenant suspension charges of approximately $33.5 million, which represented the fair value of the 10.1 million outstanding shares of common stock issued, multiplied by the closing stock price on the First Amendment Closing Date. In addition, the Company recorded debt extinguishment charges of approximately $0.8 million related to the write-off of debt issuance costs associated with the Company’s 2014 Term Credit Agreement.
In consideration for the Fifth Amendment, we paid a $2.3 million amendment fee during the three months ended March 31, 2017. The amendment fee is recorded as a direct deduction from the carrying amount of the 2014 Term Loan Facility and is being amortized through the maturity date of the 2014 Term Loan Facility using the effective interest method.
The Sixth Amendment suspended compliance with the Maximum Total Leverage Ratio and the Minimum Interest Coverage Ratio covenants through December 31, 2017. In addition, under the Sixth Amendment, the Maximum Total Leverage Ratio was 5.50 to 1.00 as of March 31, 2018 and will decrease to 4.50 to 1.00 as of June 30, 2018, 4.25 to 1.00 as of September 30, 2018 and 3.00 to 1.00 as of March 31, 2019, and thereafter. The Minimum Interest Coverage Ratio was 1.75 to 1.00 as of March 31, 2018, will increase to 2.00 to 1.00 as of June 30, 2018, decrease to 1.50 to 1.00 as of December 31, 2018 and increase to 2.75 to 1.00 as of March 31, 2019, and thereafter. The Sixth Amendment also provided that, for the four-quarter period ending March 31, 2018, Consolidated EBITDA was equal to the sum of Consolidated EBITDA for the quarterly periods ending December 31, 2017 and March 31, 2018 multiplied by two, and, for the four-quarter period ending June 30, 2018, Consolidated EBITDA shall be equal to the annualized sum of Consolidated EBITDA for the quarterly periods ending December 31, 2017, March 31, 2018 and June 30, 2018.
We are not in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio for the quarterly period ended March 31, 2018 and do not expect to be in compliance with the Maximum Total Leverage Ratio and Minimum Interest Coverage Ratio under the 2014 Term Credit Agreement for the next twelve months. In addition, we are currently not in compliance with certain other provisions under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, which expires on August 7, 2018. Absent the temporary forbearance provided under the Term Forbearance Agreement and the ABL Forbearance Agreement, the lenders would have the right to require immediate repayment of all of our debt obligations under the default provisions in the 2014 Term Credit Agreement and the 2013 ABL Credit Facility.
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Other
We are the borrower under the 2014 Term Credit Agreement, with all of our obligations guaranteed by our material U.S. subsidiaries, other than excluded subsidiaries. Obligations under the 2014 Term Loan Facility are secured by a first priority security interest in, among other things, the borrower’s and the guarantors’ equipment, subsidiary capital stock and intellectual property (the “2014 Term Loan Priority Collateral”) and a second priority security interest in, among other things, the borrower’s and the guarantors’ inventory, accounts receivable, deposit accounts and similar assets.
Unamortized debt issuance costs, primarily related to amendment fees associated with the 2014 Term Loan Facility, were $3.8 million and $4.5 million at March 31, 2018 and December 31, 2017, respectively. These costs are being amortized through the maturity date of the 2014 Term Loan Facility using the effective interest method.
2013 ABL Credit Facility
On August 7, 2013, we entered into a five-year asset based senior revolving credit facility maturing on August 7, 2018 with Bank of America, N.A. serving as sole administrative agent for the lenders thereunder, collateral agent, issuing bank and swingline lender (as amended, the “2013 ABL Credit Facility”).
The aggregate amount of commitments for the 2013 ABL Credit Facility is $100.0 million, which is comprised of $90.0 million for the U.S. facility (the “U.S. Facility”) and $10.0 million for the Canadian facility (the “Canadian Facility”). At March 31, 2018, the Company had approximately $23.0 million in outstanding borrowings under the 2013 ABL Credit Facility for working capital purposes.
The 2013 ABL Credit Facility includes a sublimit of $80.0 million for letters of credit. The borrowers under the U.S. Facility consist of all our U.S. operating subsidiaries with assets included in the borrowing base, and the U.S. Facility is guaranteed by Willbros Group, Inc. and its material U.S. subsidiaries, other than excluded subsidiaries. The borrower under the Canadian Facility is Willbros Construction Services (Canada) LP, and the Canadian Facility is guaranteed by Willbros Group, Inc. and all of its material U.S. and Canadian subsidiaries, other than excluded subsidiaries.
Advances under the U.S. and Canadian Facilities are limited to a borrowing base consisting of the sum of the following, less applicable reserves:
• | 85 percent of the value of “eligible accounts” (as defined in the 2013 ABL Credit Facility); |
• | the lesser of (i) 75 percent of the value of “eligible unbilled accounts” (as defined in the 2013 ABL Credit Facility) and (ii) $33.0 million minus the amount of eligible unbilled accounts then included in the borrowing base; and |
• | “eligible pledged cash”. |
We are also required, as part of our borrowing base calculation, to include a minimum of $25.0 million of the net proceeds of the sale of Bemis, LLC and the balance of the Professional Services segment as eligible pledged cash. We have included $40.0 million as eligible pledged cash in our March 31, 2018 borrowing base calculation, which is included in “Restricted cash” on our Condensed Consolidated Balance Sheets.
The aggregate amount of the borrowing base attributable to eligible accounts and eligible unbilled accounts constituting certain progress or milestone billings, retainage and other performance-based benchmarks may not exceed $23.0 million.
Advances in U.S. dollars bear interest at a rate equal to LIBOR or the U.S. or Canadian base rate plus an additional margin. Advances in Canadian dollars bear interest at the Bankers Acceptance (“BA”) Equivalent Rate or the Canadian prime rate plus an additional margin.
The interest rate margins will be adjusted each quarter based on our fixed charge coverage ratio as of the end of the previous quarter as follows:
Fixed Charge Coverage Ratio | U.S. Base Rate, Canadian Base Rate and Canadian Prime Rate Loans | LIBOR Loans, BA Rate Loans and Letter of Credit Fees | ||
>1.25 to 1 | 1.25% | 2.25% | ||
<1.25 to 1 and >1.15 to 1 | 1.50% | 2.50% | ||
<1.15 to 1 | 1.75% | 2.75% | ||
We will also pay an unused line fee on each of the U.S. and Canadian Facilities equal to 50 basis points when usage under the applicable facility during the preceding calendar month is less than 50 percent of the commitments or 37.5 basis points when usage under the applicable facility equals or exceeds 50 percent of the commitments for such period. With respect to the letters of credit, we will pay a letter of credit fee equal to the applicable LIBOR margin, shown in the table above, on all letters of credit and a 0.125 percent fronting fee to the issuing bank, in each case, payable monthly in arrears.
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Obligations under the 2013 ABL Credit Facility are secured by a first priority security interest in the borrowers’ and guarantors’ accounts receivable, deposit accounts and similar assets (the “ABL Priority Collateral”) and a second priority security interest in the 2014 Term Loan Priority Collateral.
In the first quarter of 2018, we repaid $5.0 million of our outstanding borrowings under the 2013 ABL Credit Facility using available cash on hand.
If our unused availability under the 2013 ABL Credit Facility is less than the greater of (i) 15.0 percent of the revolving commitments or $15.0 million for five consecutive days, or (ii) 12.5 percent of the revolving commitments or $12.5 million at any time, or upon the occurrence of certain events of default under the 2013 ABL Credit Facility (“Cash Dominion”), we are subject to increased reporting requirements, the administrative agent shall have exclusive control over any deposit account, we will not have any right of access to, or withdrawal from, any deposit account, or any right to direct the disposition of funds in any deposit account, and amounts in any deposit account will be applied to reduce the outstanding amounts under the 2013 ABL Credit Facility. In addition, if our unused availability under the 2013 ABL Credit Facility is less than the amounts described above, we would be required to comply with a Minimum Fixed Charge Coverage Ratio of 1.15 to 1.00.
Pursuant to the ABL Forbearance Agreement, the aggregate amount of commitments under the 2013 ABL Credit Facility has been reduced from $100.0 million to $90.0 million, which is comprised of $80.0 million for the U.S. Facility and $10.0 million for the Canadian Facility. In addition, during the ABL Forbearance Period, we may not request any additional loans or any new or increased letters of credit. The ABL Forbearance Agreement also provides that Cash Dominion will occur if our unused availability under the 2013 ABL Credit Facility is less than $10.0 million at any time. Under our March 31, 2018 borrowing base certificate, our unused availability under the 2013 ABL Credit Facility was $12.3 million, which is in accordance with the ABL Forbearance Agreement.
We give no assurance that we will continue to be able to avoid Cash Dominion under the 2013 ABL Credit Facility. If the Minimum Fixed Charge Coverage Ratio were to become applicable, we would not expect to be in compliance over the next twelve months and would therefore be in default under our credit agreements.
Events of Default
A default under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility may be triggered by events such as a failure to comply with financial covenants or other covenants under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, a failure to make payments when due under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, a failure to make payments when due in respect of, or a failure to perform obligations relating to, debt obligations in excess of $15.0 million, a change of control of the Company and certain insolvency proceedings. A default under the 2013 ABL Credit Facility would permit the lenders to terminate their commitment to make cash advances or issue letters of credit, require the immediate repayment of any outstanding cash advances with interest and require the cash collateralization of outstanding letter of credit obligations. A default under the 2014 Term Credit Agreement would permit the lenders to require immediate repayment of all principal, interest, fees and other amounts payable thereunder.
The 2014 Term Credit Agreement and the 2013 ABL Credit Facility also include customary representations and warranties and affirmative and negative covenants, including:
• | the preparation of financial statements in accordance with GAAP; |
• | the ability to deliver an audit opinion without a going concern explanation; |
• | the identification of any events or circumstances, either individually or in the aggregate, that has had or could reasonably be expected to have a material adverse effect on our business, results of operations, properties or financial condition; |
• | limitations on liens and indebtedness; |
• | limitations on dividends and other payments in respect of capital stock; |
• | limitations on capital expenditures; and |
• | limitations on modifications of the documentation of the 2013 ABL Credit Facility. |
Our inability to deliver our 2017 audited financial statements without a going concern explanation constitutes an event of default under the 2014 Term Credit Agreement and the 2013 ABL Credit Facility. See Note 1 – Company Description and Financial Condition in Item 1 of Part I of this Form 10-Q for more information.
On March 27, 2018, we entered into a Term Forbearance Agreement with the Term Lenders and an ABL Forbearance Agreement with the ABL Lenders. If the merger with Primoris is not completed, or if these forbearance agreements were to expire or be terminated prior to the completion of the merger, the Term Lenders and ABL Lenders would be free to exercise any
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rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Term Credit Agreement and the 2013 ABL Credit Facility, respectively. See Note 1 – Company Description and Financial Condition in Item 1 of Part I of this Form 10-Q for more information.
Cash Balances and Working Capital
As of March 31, 2018, we had cash and cash equivalents of $21.4 million. Our cash and cash equivalent balances held in the United States and foreign countries were $17.9 million and $3.5 million, respectively. In 2011, we discontinued our strategy of reinvesting non-U.S. earnings in foreign operations. Accordingly, we may repatriate foreign cash for corporate purposes without incurring additional tax expense.
In 2017, we borrowed a net $28.1 million under the 2013 ABL Credit Facility and obtained an additional term loan of $15.0 million pursuant to the Sixth Amendment to support working capital needs and fund operating losses and revenue growth. However, our significant operating losses in 2017 have led to significant negative operating cash flow in recent months, which has put a considerable strain on our overall liquidity.
In the first quarter of 2018, we borrowed $10.0 million as an Initial First-Out Loan under the 2014 Term Credit Agreement and repaid $5.0 million of our outstanding revolver borrowings under the 2013 ABL Credit Facility. In addition, Primoris may provide us with Additional First-Out Loans up to an additional $10.0 million.
Our working capital position (defined as current assets minus current liabilities) for continuing operations decreased $8.6 million to a negative $91.7 million at March 31, 2018 from a negative $83.1 million at December 31, 2017. The decrease is primarily driven by a reduction in operating cash flow driven by recent operating losses.
Cash Flows
Statements of cash flows for entities with international operations that use the local currency as the functional currency exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash charges. As a result, changes reflected in certain accounts on the Condensed Consolidated Statements of Cash Flows may not reflect the changes in corresponding accounts on the Condensed Consolidated Balance Sheets.
Cash flows provided by (used in) continuing operations by type of activity were as follows for the three months ended March 31, 2018 and 2017 (in thousands):
2018 | 2017 | Increase (Decrease) | ||||||||||
Operating activities | $ | (25,939 | ) | $ | (3,685 | ) | $ | (22,254 | ) | |||
Investing activities | 9,963 | 1,551 | 8,412 | |||||||||
Financing activities | 4,517 | (2,454 | ) | 6,971 | ||||||||
Effect of exchange rate changes | (139 | ) | 86 | (225 | ) | |||||||
Cash used in all continuing activities | $ | (11,598 | ) | $ | (4,502 | ) | $ | (7,096 | ) | |||
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Operating Activities
Cash flow from operating activities is primarily influenced by demand for our services, operating margins and the type of services we provide, but can also be influenced by working capital needs such as the timing of collection of receivables and the settlement of payables and other obligations. Working capital needs are generally higher during the summer and fall months when the majority of our capital-intensive projects are executed. Conversely, working capital assets are typically converted to cash during the late fall and winter months.
Operating activities from continuing operations used net cash of $25.9 million during the three months ended March 31, 2018 compared to $3.7 million used during the same period in 2017. The $22.2 million decrease in operating cash flow is primarily a result of the following:
• | An increase in cash flow used in contracts in progress of $13.7 million primarily related to increased business activity between periods; |
• | A decrease in cash flow provided by accounts payable of $6.4 million primarily related to an increase of vendor payments between periods; |
• | An increase in cash flow used in continuing operations, adjusted for any non-cash items, of $4.4 million primarily related to an increase in cash operating losses between periods; and |
• | An increase in cash flow used in prepaids and other assets of $3.5 million primarily related to changes in business activity. |
These items were partially offset by:
• | An increase in cash flow provided by accounts receivable of $7.0 million primarily related to lower accounts receivable balances that are mainly attributed to a higher volume of collections. |
Investing Activities
Investing activities from continuing operations provided net cash of $10.0 million during the three months ended March 31, 2018 as compared to $1.6 million provided during the same period in 2017. The $8.4 million increase in investing cash flow is primarily related to a $6.8 million increase in proceeds from the sale of property, plant and equipment and a $1.6 million increase in proceeds from the sale of subsidiaries. These increases were mainly generated through the sale of our tank services business and mainline pipeline construction business in the first quarter of 2018.
Financing Activities
Financing activities from continuing operations provided net cash of $4.5 million during the three months ended March 31, 2018 as compared to $2.5 million used during the same period of 2017. The $7.0 million increase in financing cash flow is primarily related to $10.0 million in proceeds from the Initial First-Out Loan during the first quarter of 2018 and a $1.8 million decrease in debt issuance costs between periods. These items were partially offset with an increase of $5.0 million of payments against our revolving credit facility in the first quarter of 2018.
Discontinued Operations
Discontinued operations used net cash of $0.4 million during the three months ended March 31, 2018 as compared to $0.2 million used during the three months ended March 31, 2017. The $0.2 million decrease in discontinued operations cash flow is primarily due to changes in business activity between periods associated with previously disposed businesses.
Interest Rate Risk
We are subject to interest rate risk on our debt and investment of cash and cash equivalents arising in the normal course of business and have entered into hedging arrangements to fix or otherwise limit the interest costs of our variable interest rate borrowings.
Termination of Interest Rate Swap Agreement
In August 2013, we entered into an interest rate swap agreement (the “Swap Agreement”) for a notional amount of $124.1 million to hedge changes in the variable rate interest expense on $124.1 million of our existing or replacement LIBOR indexed debt. The Swap Agreement was designated and qualified as a cash flow hedging instrument with the effective portion of the Swap Agreement’s change in fair value recorded in Other Comprehensive Income (“OCI”). The Swap Agreement was highly effective in offsetting changes in interest expense and no hedge ineffectiveness was recorded in the Consolidated Statements of Operations. The Swap Agreement was terminated in the third quarter of 2015 for $5.7 million, which was recorded in OCI as fair value. In the fourth quarter of 2015, we made an early payment of $93.6 million against our 2014 Term Loan Facility and
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therefore reclassified approximately $1.2 million of the fair value of the Swap Agreement from OCI to interest expense. In the first quarter of 2016, we made an early payment of $3.1 million against our 2014 Term Loan Facility and therefore reclassified approximately $0.1 million of the fair value of the Swap Agreement from OCI to interest expense. The remaining fair value of the Swap Agreement included in OCI will be reclassified to interest expense over the remaining life of the underlying debt with approximately $1.1 million expected to be recognized in the coming twelve months.
Capital Requirements
We continue to work towards effective liquidity management to meet the material, equipment and personnel needs to support our project and MSA commitments. In 2017, we borrowed $28.1 million under the 2013 ABL Credit Facility for working capital purposes and obtained an additional term loan of $15.0 million pursuant to the Sixth Amendment. In the first quarter of 2018, we borrowed an additional $10.0 million as an Initial First-Out Loan under the 2014 Term Credit Agreement and repaid $5.0 million of our outstanding revolver borrowings under the 2013 ABL Credit Facility. Pursuant to the ABL Forbearance Agreement, we may not request any additional loans or any new or increased letters of credit under the 2013 ABL Credit Facility. In addition, Primoris may provide us with Additional First-Out Loans up to an additional $10.0 million.
Contractual Obligations
Other commercial commitments, as detailed in our Annual Report on Form 10-K for the year ended December 31, 2017, did not materially change except for payments made in the normal course of business.
NEW ACCOUNTING STANDARDS
See Note 3 – New Accounting Standards in the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q for a summary of any recently issued accounting standards.
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FORWARD-LOOKING STATEMENTS
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments which we expect or anticipate will or may occur in the future, including such things as our ability to continue as a going concern, our ability to complete our planned merger with Primoris, future capital expenditures (including the amount and nature thereof), oil, gas, gas liquids and power prices, demand for our services, the amount and nature of future investments by governments, expansion and other development trends of the oil and gas and power industries, business strategy, expansion and growth of our business and operations, the outcome of legal proceedings and other such matters are forward-looking statements. These forward-looking statements are based on assumptions and analyses we made in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties. As a result, actual results could differ materially from our expectations. Factors that could cause actual results to differ from those contemplated by our forward-looking statements include, but are not limited to, the following:
• | our stockholders fail to approve the proposed merger transaction with Primoris; |
• | we or the other parties to the Merger Agreement are unable to satisfy the conditions to the completion of the merger, or are unable to obtain any regulatory approvals required for the merger on the terms expected, on the anticipated schedule, or at all; |
• | we are unable to close the merger or the merger is delayed, either as a result of litigation related to the transaction or otherwise; |
• | the parties are unable to achieve the anticipated benefits of the merger transaction; |
• | completing the merger may distract our management from other important matters; |
• | inability to comply with the terms of the ABL Forbearance Agreement or Term Forbearance Agreement; |
• | inability to comply with the covenants in or to obtain waivers under our credit facilities; |
• | the loss of customers, suppliers and key personnel that may occur as a result of our issuing financial statements with a “going concern” qualification or explanation, and the possibility that we may seek protection under the U.S. Bankruptcy Code; |
• | inability to obtain adequate financing on reasonable terms; |
• | curtailment of capital expenditures due to low prevailing commodity prices or other factors, and the unavailability of project funding in the power and oil and gas industries; |
• | inability to execute fixed-price and cost-reimbursable projects within the target cost, thus eroding contract margin and, potentially, contract income on any such project; |
• | increased capacity and decreased demand for our services in the more competitive industry segments that we serve; |
• | the demand for energy moderating or diminishing; |
• | cancellation or delay of projects, in whole or in part, for any reason; |
• | failure to obtain the timely award of one or more projects; |
• | inability to obtain sufficient surety bonds or letters of credit; |
• | reduced creditworthiness of our customer base and higher risk of non-payment of receivables; |
• | project cost overruns, unforeseen schedule delays and the application of liquidated damages; |
• | inability to lower our cost structure to remain competitive in the market or to achieve anticipated operating margins; |
• | inability of the energy service sector to reduce costs when necessary to a level where our customers’ project economics support a reasonable level of development work; |
• | reduction of services to existing and prospective clients when they bring historically out-sourced services back in-house to preserve intellectual capital and minimize layoffs; |
• | the consequences we may encounter if, in the future, we identify any material weaknesses in our internal control over financial reporting which may adversely affect the accuracy and timing of our financial reporting; |
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• | the impact of any litigation associated with our restatement of first and second quarter 2014 financial results on our financial position and results of operations, including our defense costs and the costs and other effects of settlements or judgments; |
• | adverse weather conditions not anticipated in bids and estimates; |
• | the occurrence during the course of our operations of accidents and injuries to our personnel, as well as to third parties, that negatively affect our safety record, which is a factor used by many clients to pre-qualify and otherwise award work to contractors in our industry; |
• | failing to realize cost recoveries on claims or change orders from projects completed or in progress within a reasonable period after completion of the relevant project; |
• | political or social circumstances impeding the progress of our work and increasing the cost of performance; |
• | inability to predict the timing of an increase in energy sector capital spending, which results in staffing below the level required to service such an increase; |
• | inability to hire and retain sufficient skilled labor to execute our current work, our work in backlog and future work we have not yet been awarded; |
• | loss of the services of key management personnel; |
• | the consequences we may encounter if we violate the Foreign Corrupt Practices Act (the “FCPA”) or other anti-corruption laws in view of the 2008 final settlements with the Department of Justice and the Securities and Exchange Commission (“SEC”) in which we admitted prior FCPA violations, including the imposition of civil or criminal fines, penalties, enhanced monitoring arrangements, or other sanctions that might be imposed; |
• | the dishonesty of employees and/or other representatives or their refusal to abide by applicable laws and our established policies and rules; |
• | inability to obtain and maintain legal registration status in one or more foreign countries in which we are seeking to do business; |
• | downturns in general economic, market or business conditions in our target markets; |
• | changes in and interpretation of U.S. and foreign tax laws that impact our worldwide provision for income taxes and effective income tax rate; |
• | changes in applicable laws or regulations, or changed interpretations thereof, including climate change regulation; |
• | changes in the scope of our expected insurance coverage; |
• | inability to manage insurable risk at an affordable cost; |
• | enforceable claims for which we are not fully insured; |
• | incurrence of insurable claims in excess of our insurance coverage; |
• | the occurrence of the risk factors listed elsewhere in this Form 10-Q or described in our periodic filings with the SEC; and |
• | other factors, most of which are beyond our control. |
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the consequences for, or effects on, our business or operations that we anticipate today. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Unless the context requires or is otherwise noted, all references in this Form 10-Q to “Willbros,” the “Company,” “we,” “us” and “our” refer to Willbros Group, Inc., its consolidated subsidiaries and their predecessors.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to interest rate risk on our debt and investment of cash and cash equivalents arising in the normal course of business and have entered into hedging arrangements to fix or otherwise limit the interest costs of our variable interest rate borrowings.
Termination of Interest Rate Swap Agreement
In August 2013, we entered into an interest rate swap agreement for a notional amount of $124.1 million to hedge changes in the variable rate interest expense on $124.1 million of our existing or replacement LIBOR indexed debt. The Swap Agreement was designated and qualified as a cash flow hedging instrument with the effective portion of the Swap Agreement’s change in fair value recorded in OCI. The Swap Agreement was highly effective in offsetting changes in interest expense and no hedge ineffectiveness was recorded in the Consolidated Statements of Operations. The Swap Agreement was terminated in the third quarter of 2015 for $5.7 million, which was recorded in OCI as fair value. In the fourth quarter of 2015, we made an early payment of $93.6 million against our 2014 Term Loan Facility and therefore reclassified approximately $1.2 million of the fair value of the Swap Agreement from OCI to interest expense. In the first quarter of 2016, we made an early payment of $3.1 million against our 2014 Term Loan Facility and therefore reclassified approximately $0.1 million of the fair value of the Swap Agreement from OCI to interest expense. The remaining fair value of the Swap Agreement included in OCI will be reclassified to interest expense over the remaining life of the underlying debt with approximately $1.1 million expected to be recognized in the coming twelve months.
Foreign Currency Risk
We are exposed to market risk associated with changes in non-U.S. (primarily Canada) currency exchange rates. To mitigate our risk, we may borrow in Canadian dollars under our Canadian Facility to settle U.S. dollar account balances.
We attempt to negotiate contracts which provide for payment in U.S. dollars, but we may be required to take all or a portion of payment under a contract in another currency. To mitigate non-U.S. currency exchange risk, we seek to match anticipated non-U.S. currency revenue with expense in the same currency whenever possible. To the extent we are unable to match non-U.S. currency revenue with expense in the same currency, we may use forward contracts, options or other common hedging techniques in the same non-U.S. currencies. We had no forward contracts or options at March 31, 2018 and 2017.
Other
The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities shown in the Condensed Consolidated Balance Sheets approximate fair value at March 31, 2018 due to the generally short maturities of these items. At March 31, 2018, we invested primarily in short-term dollar denominated bank deposits. We have the ability and expect to hold our investments to maturity.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As of March 31, 2018, we have carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, our disclosure controls and procedures were effective in providing the reasonable assurance described above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended March 31, 2018, that materially affected, or is 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 legal proceedings, see the discussion under the caption “Contingencies” in Note 13 – Contingencies, Commitments and Other Circumstances, of our “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Form 10-Q, which information from Note 13 is incorporated by reference herein.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors involving us from those previously disclosed in Item 1A of Part I included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases of our common stock by us during the quarter ended March 31, 2018:
Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
January 1, 2018 – January 31, 2018 | 5,919 | $ | 1.27 | — | — | ||||||||
February 1, 2018 – February 28, 2018 | — | — | — | — | |||||||||
March 1, 2018 – March 31, 2018 | 22,980 | 0.84 | — | — | |||||||||
Total | 28,899 | $ | 0.93 | — | — | ||||||||
(1) | Represents shares of common stock acquired from certain of our officers and key employees under the share withholding provisions of our 2010 Stock and Incentive Compensation Plan and our 2017 Stock and Incentive Compensation Plan for the payment of taxes associated with the vesting of shares of restricted stock and restricted stock units granted under such plan. |
(2) | The price paid per common share represents the closing sales price of a share of our common stock, as reported in the NYSE composite transactions or in the over-the-counter market, on the day that the stock was acquired by us. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
The following documents are included as exhibits to this Form 10-Q. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.
Exhibit Number | Description |
2 | |
3 | |
10.1 | |
10.2 | |
10.3 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Schedules and exhibits may have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules or exhibits upon request by the U.S. Securities and Exchange Commission; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedules or exhibits so furnished.
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SIGNATURE
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.
WILLBROS GROUP, INC. | ||
Date: May 9, 2018 | By: | /s/ Jeffrey B. Kappel |
Jeffrey B. Kappel | ||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||
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