Quarterly report pursuant to Section 13 or 15(d)

CHANGES IN BUSINESS

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CHANGES IN BUSINESS
6 Months Ended
Jun. 30, 2018
CHANGES IN BUSINESS  
CHANGES IN BUSINESS

NOTE 4—CHANGES IN BUSINESS

Discontinued Operations

During the fourth quarter of 2017, the Company made the decision to exit and sell its Electrical Solutions segment (which is comprised solely of Koontz-Wagner, a wholly owned subsidiary of the Company) in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. As a result of the Company’s decision to sell the Electrical Solutions segment, the Company performed an impairment analysis on this segment’s finite- and indefinite-lived intangible assets (customer relationships and trade names, respectively) and determined that their carrying value exceeded their fair value. As a result, in the fourth quarter of 2017, the Company recorded an impairment charge of $9.7 million related to these intangible assets. After the impairment charge, the fair value of this segment’s intangible assets was zero at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no other non-recurring fair value remeasurements related to the Electrical Solutions segment during the year ended December 31, 2017 or three and six months ended June 30, 2018.

In spite of the Company’s efforts, which included retaining financial advisors to sell all or part of Koontz-Wagner’s operations, inside or outside of a federal bankruptcy or state court proceeding (including Chapter 11 of Title 11 of the Code), the proposed disposition did not progress as planned due, primarily, to the absence of viable bids in the sale process, the inability of Koontz-Wagner to fund its ongoing operations or obtain financing to do so, and Koontz-Wagner’s deteriorating financial performance. As a result, on July 11, 2018, Koontz-Wagner filed a voluntary petition for relief under Chapter 7 of Title 11 of the Code with the U.S. Bankruptcy Court for the Southern District of Texas. The filing was for Koontz-Wagner only, not for the Company as a whole, and was completely separate and distinct from the Williams business and operations. Please refer to “Note 12 – Subsequent Events” for additional discussion on the bankruptcy filing.

During the third quarter of 2017, the Company made the decision to exit and sell substantially all of the operating assets and liabilities of its Mechanical Solutions segment in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. The Mechanical Solutions and the Electrical Solutions segments were the only components of the business that qualified for discontinued operations for all periods presented.

On October 11, 2017, the Company sold substantially all of the operating assets and liabilities of its Mechanical Solutions segment for $43.0 million and used a portion of the proceeds to pay down $34.0 million of the Company’s outstanding debt and related fees, including full repayment of the First-Out Loan (as defined below). Additionally, on October 31, 2017, the Company completed the sale of its manufacturing facility in Mexico and auctioned the remaining production equipment and other assets for net proceeds of $3.6 million, of which $1.9 million was used to reduce the principal amount of the Initial Centre Lane Facility (as defined below). The remainder was used to fund working capital requirements. In the fourth quarter of 2017, the Company recorded a total gain of $6.3 million related to these sales.

The Company excluded an asset and liability from the sale of the Mechanical Solutions segment, which were comprised of the Company’s office building located in Heerlen, Netherlands and its liability for uncertain tax positions. The liability was included in long-term liabilities of discontinued operations in the June 30, 2018 and December 31, 2017 condensed consolidated balance sheets. The asset was included in current assets of discontinued operations in the December 31, 2017 condensed consolidated balance sheet. At the time the Heerlen office building met the “asset held for sale” criteria, its carrying value was $0.5 million; however, the Company subsequently determined that the building’s carrying value exceeded its fair value and, consequently, it recorded an impairment charge of $0.2 million during the fourth quarter of 2017. The impairment charge was included in loss from discontinued operations before income tax expense (benefit) in the consolidated statement of operations for the year ended December 31, 2017. After the impairment charge, the fair value of the Heerlen building was $0.3 million at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no other non-recurring fair value remeasurements related to the Mechanical Solutions segment during the year ended December 31, 2017.

On March 21, 2018, the Company closed on the sale of its office building in Heerlen, Netherlands for $0.3 million, resulting in an immaterial gain on sale, which was reflected in loss from discontinued operations before income tax expense (benefit) in the Company’s condensed consolidated statement of operations for the six months ended June 30, 2018.

In connection with the sale of its Mechanical Solutions segment, the Company entered into a transition services agreement with the purchaser to provide certain accounting and administrative services for an initial period of nine months. For each of the three and six months ended June 30, 2018, the Company provided $0.1 million and $0.2 million, respectively, in services for the purchaser, which was included in general and administrative expenses from continuing operations in the condensed consolidated statement of operations.

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of discontinued operations:

 

 

 

 

 

 

 

(in thousands)

  

June 30, 2018

 

December 31, 2017

Assets:

 

 

 

 

 

 

Accounts receivable

 

$

5,465

 

$

12,296

Inventories, net

 

 

483

 

 

178

Cost and estimated earnings in excess of billings

 

 

11,379

 

 

11,325

Other current assets

 

 

597

 

 

493

Property, plant and equipment, net

 

 

3,347

 

 

3,630

Current assets of discontinued operations*

 

$

21,271

 

$

27,922

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,927

 

$

7,004

Accrued compensation and benefits 

 

 

1,315

 

 

1,191

Billings in excess of costs and estimated earnings 

 

 

1,519

 

 

948

Accrued warranties

 

 

1,109

 

 

1,166

Other current liabilities

 

 

9,494

 

 

18,493

Current liabilities of discontinued operations

 

 

22,364

 

 

28,802

Liability for uncertain tax positions

 

 

2,406

 

 

3,110

Long-term liabilities of discontinued operations

 

 

2,406

 

 

3,110

Total liabilities of discontinued operations

 

$

24,770

 

$

31,912

* The total assets of discontinued operations were classified as current on the June 30, 2018 and December 31, 2017 condensed consolidated balance sheets because it was probable that a sale will occur and proceeds will be collected within one year.

The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations. In accordance with GAAP, the amounts in the table below do not include an allocation of corporate overhead.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(in thousands)

  

2018

  

2017

  

2018

  

2017

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Electrical Solutions

 

$

6,197

 

$

10,532

 

$

19,041

 

$

24,079

Mechanical Solutions

 

 

 —

 

 

17,901

 

 

 —

 

 

34,579

Total revenue

 

 

6,197

 

 

28,433

 

 

19,041

 

 

58,658

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

Electrical Solutions

 

 

6,868

 

 

12,560

 

 

20,323

 

 

27,730

Mechanical Solutions

 

 

 —

 

 

14,963

 

 

 —

 

 

28,493

Total cost of revenue

 

 

6,868

 

 

27,523

 

 

20,323

 

 

56,223

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

234

 

 

1,141

 

 

173

 

 

2,410

General and administrative expenses

 

 

1,223

 

 

4,124

 

 

2,366

 

 

8,463

Gain on disposal - Mechanical Solutions

 

 

115

 

 

 —

 

 

91

 

 

 —

Other

 

 

(48)

 

 

168

 

 

(9)

 

 

329

Income (loss) from discontinued operations before income taxes

 

 

(2,195)

 

 

(4,523)

 

 

(3,903)

 

 

(8,767)

Income tax expense (benefit)

 

 

(725)

 

 

241

 

 

(683)

 

 

1,220

Income (loss) from discontinued operations 

 

$

(1,470)

 

$

(4,764)

 

$

(3,220)

 

$

(9,987)

Disposition of Hetsco

In June 2016, the Company engaged a financial advisor to assist with the sale of its wholly owned subsidiary, Hetsco, Inc. (“Hetsco”), in order to pay down debt. Hetsco was previously included in the Services segment. In connection with the Company’s decision to sell Hetsco, the net assets were adjusted to estimated fair value less estimated selling expenses, which resulted in a write-down of $8.3 million in 2016.

On January 13, 2017, the Company sold the stock of Hetsco for $23.2 million in cash, inclusive of working capital adjustments. After transaction costs and an escrow withholding of $1.5 million, the net proceeds of $20.2 million were used to reduce debt. In connection with the Company’s decision to sell Hetsco, the net assets were adjusted to estimated fair value less estimated selling expenses, which resulted in a write-down of $8.3 million in 2016. In the first quarter of 2017, the Company recorded a $0.2 million adjustment, which reduced the $8.3 million loss recorded in 2016.

A summary of Hetsco’s income before income taxes for the three and six months ended June 30, 2018 and 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(in thousands)

  

2018

  

2017

  

2018

  

2017

Income before income taxes

 

$

 —

 

$

 —

 

$

 —

 

$

489