Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - BWX Technologies, Inc.Financial_Report.xls
EX-95 - EX-95 - BWX Technologies, Inc.d794625dex95.htm
EX-31.2 - EX-31.2 - BWX Technologies, Inc.d794625dex312.htm
EX-32.2 - EX-32.2 - BWX Technologies, Inc.d794625dex322.htm
EX-31.1 - EX-31.1 - BWX Technologies, Inc.d794625dex311.htm
EX-32.1 - EX-32.1 - BWX Technologies, Inc.d794625dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 001-34658

 

 

THE BABCOCK & WILCOX COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   80-0558025

(State of Incorporation

or Organization)

 

(I.R.S. Employer

Identification No.)

THE HARRIS BUILDING  
13024 BALLANTYNE CORPORATE PLACE  
SUITE 700  
CHARLOTTE, NORTH CAROLINA   28277
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (704) 625-4900

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding at October 31, 2014 was 106,553,653.

 

 

 


Table of Contents

THE BABCOCK & WILCOX COMPANY

INDEX - FORM 10 - Q

 

     PAGE  

PART I - FINANCIAL INFORMATION

  

Item 1 – Condensed Consolidated Financial Statements

     2   

Condensed Consolidated Balance Sheets September 30, 2014 and December 31, 2013 (Unaudited)

     3   

Condensed Consolidated Statements of Income Three and Nine Months Ended September  30, 2014 and 2013 (Unaudited)

     5   

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended September  30, 2014 and 2013 (Unaudited)

     6   

Condensed Consolidated Statements of Stockholders’ Equity Nine Months Ended September  30, 2014 and 2013 (Unaudited)

     7   

Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     8   

Notes to Condensed Consolidated Financial Statements

     9   

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4 – Controls and Procedures

     41   

PART II - OTHER INFORMATION

  

Item 1 – Legal Proceedings

     42   

Item 1A – Risk Factors

     42   

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

     42   

Item 4 – Mine Safety Disclosures

     43   

Item 6 – Exhibits

     44   

SIGNATURES

     45   

 

1


Table of Contents

PART I

THE BABCOCK & WILCOX COMPANY

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

2


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

 

     September 30,
2014
     December 31,
2013
 
     (Unaudited)  
     (In thousands)  

Current Assets:

     

Cash and cash equivalents

   $ 196,921       $ 346,116   

Restricted cash and cash equivalents

     43,200         45,945   

Investments

     19,046         10,748   

Accounts receivable – trade, net

     424,875         360,323   

Accounts receivable – other

     66,052         45,480   

Contracts in progress

     350,165         370,820   

Inventories

     116,533         113,058   

Deferred income taxes

     97,770         97,170   

Other current assets

     57,297         47,764   
  

 

 

    

 

 

 

Total Current Assets

     1,371,859         1,437,424   
  

 

 

    

 

 

 

Property, Plant and Equipment

     1,179,435         1,126,683   

Less accumulated depreciation

     716,309         679,604   
  

 

 

    

 

 

 

Net Property, Plant and Equipment

     463,126         447,079   
  

 

 

    

 

 

 

Investments

     4,483         4,426   
  

 

 

    

 

 

 

Goodwill

     395,301         281,708   
  

 

 

    

 

 

 

Deferred Income Taxes

     117,159         127,076   
  

 

 

    

 

 

 

Investments in Unconsolidated Affiliates

     141,914         184,831   
  

 

 

    

 

 

 

Intangible Assets

     114,540         81,521   
  

 

 

    

 

 

 

Other Assets

     48,388         45,088   
  

 

 

    

 

 

 

TOTAL

   $ 2,656,770       $ 2,609,153   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

     September 30,
2014
    December 31,
2013
 
     (Unaudited)  
     (In thousands, except share and per
share amounts)
 

Current Liabilities:

    

Notes payable and current maturities of long-term debt

   $ 8,890      $ 4,671   

Accounts payable

     212,069        319,774   

Accrued employee benefits

     100,690        163,833   

Accrued liabilities – other

     87,707        58,192   

Advance billings on contracts

     232,008        317,771   

Accrued warranty expense

     59,574        56,436   

Income taxes payable

     10,182        6,551   
  

 

 

   

 

 

 

Total Current Liabilities

     711,120        927,228   
  

 

 

   

 

 

 

Long-Term Debt

     298,776        225   
  

 

 

   

 

 

 

Accumulated Postretirement Benefit Obligation

     46,049        43,194   
  

 

 

   

 

 

 

Environmental Liabilities

     55,951        53,391   
  

 

 

   

 

 

 

Pension Liability

     346,198        336,878   
  

 

 

   

 

 

 

Other Liabilities

     58,709        65,296   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 5)

    

Stockholders’ Equity:

    

Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 121,417,899 and 120,536,910 shares at September 30, 2014 and December 31, 2013, respectively

     1,214        1,205   

Preferred stock, par value $0.01 per share, authorized 75,000,000 shares; No shares issued

     —          —     

Capital in excess of par value

     772,842        747,189   

Retained earnings

     756,572        656,916   

Treasury stock at cost, 14,910,058 and 10,068,731 shares at September 30, 2014 and December 31, 2013, respectively

     (423,821     (268,971

Accumulated other comprehensive income

     17,242        28,348   
  

 

 

   

 

 

 

Stockholders’ Equity – The Babcock & Wilcox Company

     1,124,049        1,164,687   

Noncontrolling interest

     15,918        18,254   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,139,967        1,182,941   
  

 

 

   

 

 

 

TOTAL

   $ 2,656,770      $ 2,609,153   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  
     (Unaudited)  
     (In thousands, except share and per share amounts)  

Revenues

   $ 737,902      $ 774,834      $ 2,085,925      $ 2,466,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses:

        

Cost of operations

     554,614        578,394        1,569,229        1,884,134   

Research and development costs

     8,379        23,787        63,293        52,970   

Losses (gains) on asset disposals and impairments, net

     (605     1,258        852        1,345   

Selling, general and administrative expenses

     108,987        102,576        305,590        313,113   

Special charges for restructuring activities

     8,675        4,849        28,803        25,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Costs and Expenses

     680,050        710,864        1,967,767        2,277,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Income of Investees

     7,308        18,151        35,760        51,713   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     65,160        82,121        153,918        241,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense):

        

Interest income

     267        480        876        1,135   

Interest expense

     (2,978     (631     (4,798     (2,238

Other – net

     18,625        (533     20,527        1,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expense)

     15,914        (684     16,605        775   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before Provision for Income Taxes

     81,074        81,437        170,523        241,815   

Provision for Income Taxes

     20,671        24,416        45,474        70,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     60,403        57,021        125,049        171,598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss Attributable to Noncontrolling Interest

     811        3,425        7,646        8,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to The Babcock & Wilcox Company

   $ 61,214      $ 60,446      $ 132,695      $ 180,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Common Share:

        

Basic:

        

Net Income Attributable to The Babcock & Wilcox Company

   $ 0.57      $ 0.54      $ 1.22      $ 1.61   

Diluted:

        

Net Income Attributable to The Babcock & Wilcox Company

   $ 0.57      $ 0.54      $ 1.21      $ 1.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation of earnings per share (Note 10):

        

Basic

     107,105,986        110,931,376        109,103,879        112,309,170   

Diluted

     107,444,284        111,749,381        109,482,318        113,049,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  
     (In thousands)  

Net Income

   $ 60,403      $ 57,021      $ 125,049      $ 171,598   

Other Comprehensive Income (Loss):

        

Currency translation adjustments

     (6,837     5,238        (13,979     (2,330

Derivative financial instruments:

        

Unrealized gains (losses) arising during the period, net of tax (provision) benefit of $386, $(338), $436 and $1,004, respectively

     (1,115     928        (1,257     (2,940

Reclassification adjustment for (gains) losses included in net income, net of tax provision (benefit) of $(279), $158, $(266) and $(671), respectively

     807        (436     760        1,853   

Recognition of benefit plan costs, net of tax benefit of $(898), $(264), $(1,293) and $(782), respectively

     2,505        490        3,299        1,483   

Available-for-sale investments:

        

Unrealized gains arising during the period, net of tax provision of $(3), $(42), $(60) and $(48), respectively

     5        75        108        203   

Reclassification adjustment for gains included in net income, net of tax provision of $7, $2, $22 and $5, respectively

     (14     (4     (40     (725
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (4,649     6,291        (11,109     (2,456
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

     55,754        63,312        113,940        169,142   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Loss Attributable to Noncontrolling Interest

     810        3,466        7,649        8,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to The Babcock & Wilcox Company

   $ 56,564      $ 66,778      $ 121,589      $ 178,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

                            Accumulated                          
    Common Stock     Capital In
Excess of
    Retained     Other
Comprehensive
    Treasury     Stockholders’     Noncontrolling     Total
Stockholders’
 
    Shares     Par Value     Par Value     Earnings     Income (Loss)     Stock     Equity     Interest     Equity  
    (In thousands, except share and per share amounts)  

Balance December 31, 2013

    120,536,910      $ 1,205      $ 747,189      $ 656,916      $ 28,348      $ (268,971   $ 1,164,687      $ 18,254      $ 1,182,941   

Net income

    —          —          —          132,695        —          —          132,695        (7,646     125,049   

Dividends declared ($0.30 per share)

    —          —          —          (33,039     —          —          (33,039     —          (33,039

Defined benefit obligations

    —          —          —          —          3,299        —          3,299        —          3,299   

Available-for-sale investments

    —          —          —          —          68        —          68        —          68   

Currency translation adjustments

    —          —          —          —          (13,976     —          (13,976     (3     (13,979

Derivative financial instruments

    —          —          —          —          (497     —          (497     —          (497

Exercise of stock options

    152,965        1        3,926        —          —          —          3,927        —          3,927   

Contributions to thrift plan

    307,748        3        9,946        —          —          —          9,949        —          9,949   

Shares placed in treasury

    —          —          —          —          —          (154,850     (154,850     —          (154,850

Stock-based compensation charges

    420,276        5        11,781        —          —          —          11,786        —          11,786   

Contribution of in-kind services

    —          —          —          —          —          —          —          5,830        5,830   

Distributions to noncontrolling interests

    —          —          —          —          —          —          —          (517     (517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014 (unaudited)

    121,417,899      $ 1,214      $ 772,842      $ 756,572      $ 17,242      $ (423,821   $ 1,124,049      $ 15,918      $ 1,139,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2012

    119,608,026      $ 1,196      $ 713,257      $ 349,063      $ 32,728      $ (109,809   $ 986,435      $ 16,481      $ 1,002,916   

Net income

    —          —          —          180,490        —          —          180,490        (8,892     171,598   

Dividends declared ($0.24 per share)

    —          —          —          (27,085     —          —          (27,085     —          (27,085

Defined benefit obligations

    —          —          —          —          1,483        —          1,483        —          1,483   

Available-for-sale investments

    —          —          —          —          (522     —          (522     —          (522

Currency translation adjustments

    —          —          —          —          (2,285     —          (2,285     (45     (2,330

Derivative financial instruments

    —          —          —          —          (1,087     —          (1,087     —          (1,087

Exercise of stock options

    187,845        3        3,800        —          —          —          3,803        —          3,803   

Contributions to thrift plan

    345,037        3        10,016        —          —          —          10,019        —          10,019   

Shares placed in treasury

    —          —          —          —          —          (142,188     (142,188     —          (142,188

Stock-based compensation charges

    220,840        2        13,070        —          —          —          13,072        —          13,072   

Contribution of in-kind services

    —          —          —          —          —          —          —          11,289        11,289   

Distributions to noncontrolling interests

    —          —          —          —          —          —          —          (414     (414
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013 (unaudited)

    120,361,748      $ 1,204      $ 740,143      $ 502,468      $ 30,317      $ (251,997   $ 1,022,135      $ 18,419      $ 1,040,554   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
September 30,
 
     2014     2013  
     (Unaudited)  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 125,049      $ 171,598   

Non-cash items included in net income:

    

Depreciation and amortization

     57,400        51,341   

Income of investees, net of dividends

     16,920        (18,419

Losses on asset disposals and impairments

     3,870        1,345   

Gain on exchange of USEC investment

     (18,647     —     

In-kind research and development costs

     5,830        11,289   

Recognition of losses for pension and postretirement plans

     12,952        2,265   

Stock-based compensation expense

     11,786        13,072   

Excess tax benefits from stock-based compensation

     (568     (64

Changes in assets and liabilities, net of effects of acquisitions:

    

Accounts receivable

     (62,220     (44,663

Accounts payable

     (115,271     5,305   

Contracts in progress and advance billings on contracts

     (74,214     (140,862

Inventories

     138        10,559   

Income taxes

     (11,804     (1,284

Accrued and other current liabilities

     13,206        (3,588

Pension liability, accrued postretirement benefit obligation and employee benefits

     (66,679     (69,842

Other, net

     17,057        5,921   
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (85,195     (6,027
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Decrease in restricted cash and cash equivalents

     2,745        14,669   

Purchases of property, plant and equipment

     (55,877     (45,288

Acquisition of business, net of cash acquired

     (127,705     —     

Purchase of intangible assets

     (722     (2,200

Purchases of available-for-sale securities

     (21,225     (79,747

Sales and maturities of available-for-sale securities

     31,663        122,677   

Investment in equity and cost method investees

     (4,900     (2,807

Proceeds from asset disposals

     846        586   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (175,175     7,890   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment of short-term borrowing and long-term debt

     (4,424     (157

Borrowings under short-term arrangements

     2,855        649   

Borrowings under Credit Agreement

     809,300        —     

Repayments under Credit Agreement

     (504,900     —     

Payment of debt issuance costs

     (5,390     —     

Repurchase of common shares

     (149,774     (140,143

Dividends paid to common shareholders

     (32,799     (27,082

Excess tax benefits from stock-based compensation

     568        64   

Exercise of stock options

     3,854        3,756   

Other

     (202     (414
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     119,088        (163,327
  

 

 

   

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH

     (7,913     (2,255
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (149,195     (163,719

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     346,116        383,547   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 196,921      $ 219,828   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest (net of amount capitalized)

   $ 3,573      $ 1,341   

Income taxes (net of refunds)

   $ 52,845      $ 70,602   

SCHEDULE OF NON-CASH INVESTING ACTIVITY:

    

Accrued capital expenditures included in accounts payable

   $ 3,201      $ 6,040   

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

THE BABCOCK & WILCOX COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We have presented our condensed consolidated financial statements in U.S. Dollars in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Certain financial information and disclosures normally included in our financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and notes in our annual report on Form 10-K for the year ended December 31, 2013 (our “2013 10-K”). We have included all adjustments, in the opinion of management, consisting only of normal recurring adjustments, necessary for a fair presentation.

We use the equity method to account for investments in entities that we do not control, but over which we have the ability to exercise significant influence. We generally refer to these entities as “joint ventures.” We have eliminated all intercompany transactions and accounts. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

Unless the context otherwise indicates, “we,” “us” and “our” mean The Babcock & Wilcox Company (“B&W”) and its consolidated subsidiaries.

Reporting Segments

We operate in five reportable segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Our reportable segments are further described as follows:

 

    Our Power Generation segment provides an advanced, clean and diverse portfolio of steam generating equipment, proven emissions control systems for environmental regulations, renewable energy solutions (biomass, combined heat and power, waste-to-energy and concentrating solar power), boiler cleaning systems, material transport equipment, fuel handling systems, cogeneration and combined cycle installations, and carbon capture and sequestration technologies. For this full range of product offerings, we offer complete aftermarket, operation and maintenance and construction project services. We provide products and services to electric utilities, municipalities, EPC contractors, architect engineers, independent power producers, international trading firms, electric power cooperatives and state electricity boards. Our markets include electric power generation, industrial, pulp and paper, chemical, oil refinery, cement, institutional, municipal and government customers worldwide. We have an extensive North American and global footprint including engineering, design, service, manufacturing, sales, business development, regional service centers, manufacturers’ representatives and joint venture facilities located in more than 30 countries around the globe. We have supplied product and services for more than 300,000 MW of installed electric generating capacity in more than 80 countries.

Our steam generating equipment operates on a range of traditional fossil fuels including coal, natural gas and oil along with renewable, unconventional and other typical waste fuel streams. We have commercialized many advanced emissions technologies to control nitrogen oxide, sulfur dioxide, sulfur trioxide, coarse and fine particulate matter, mercury, acid gases and other hazardous air emissions.

On June 20, 2014, we completed the acquisition of MEGTEC Holdings, Inc. (“MEGTEC”). MEGTEC designs, engineers, manufactures and services air pollution control systems and coating/drying equipment for a variety of industrial applications and is expected to complement our environmental products and solutions offerings.

See Note 11 for discussion regarding our Board of Directors’ approval of a plan to pursue the spin-off of the Power Generation business.

 

   

Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy (“DOE”)/National Nuclear Security Administration’s (“NNSA”) Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Through this segment, we own

 

9


Table of Contents
 

and operate manufacturing facilities located in Lynchburg, Virginia; Mount Vernon, Indiana; Euclid, Ohio; Barberton, Ohio; and Erwin, Tennessee. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components. These two locations are N-Stamp certified by the American Society of Mechanical Engineers (“ASME”), making them two of only a few North American suppliers of large, heavy-walled nuclear components and vessels. The Euclid facility, which is also ASME N-Stamp certified, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. (“NFS”), one of our wholly owned subsidiaries. Located in Erwin, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.

 

    Our Technical Services segment provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities. These services are provided to the Department of Defense and the DOE, including the NNSA, the Office of Nuclear Energy, the Office of Science and the Office of Environmental Management. Through this segment we deliver products and management solutions to nuclear operations and high-consequence manufacturing facilities. A significant portion of this segment’s operations are conducted through joint ventures.

 

    Our Nuclear Energy segment supplies commercial nuclear steam generators and components to nuclear utility customers. B&W has supplied the nuclear industry with more than 1,300 large, heavy components worldwide. This segment is the only heavy nuclear component, N-Stamp certified manufacturer in North America. Our Nuclear Energy segment fabricates pressure vessels, reactors, steam generators, heat exchangers and other auxiliary equipment. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development and metallurgy and materials engineering. In addition, this segment offers services for nuclear steam generators and balance of plant equipment, as well as nondestructive examination and tooling/repair solutions for other plant systems and components.

 

    Our mPower segment is designing the B&W mPowerTM reactor, a small modular reactor (“SMR”) design generally based on proven light-water nuclear technology and able to operate for four years without refueling. Through our majority-owned joint venture, Generation mPower LLC (“GmP”), we are developing the associated mPower Plant power generating facility, which will use two B&W mPowerTM reactors to generate 360 MW within an advanced passively safe and secure plant architecture. As part of this initiative, we were selected to receive funding pursuant to a Cooperative Agreement with the DOE under its Small Modular Reactor Licensing Technical Support Program (the “Funding Program”) for SMR deployment by 2022. This Funding Program provides financial assistance for our mPower Plant design, engineering and licensing activities supporting the planned first mPower Plant. On April 14, 2014, we announced our plans to restructure the mPower program to focus on technology development. Beginning in the third quarter of 2014, we slowed the pace of development and intend to invest no more than $15 million on an annual basis, net of amounts reimbursed from the Funding Program. We intend to work with the DOE to amend the Funding Program to include, among other things, mutually agreeable program milestones for continued funding and a revised commercial operating date beyond 2022. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.

See Note 9 for further information regarding our segments.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and the related footnotes included in our 2013 10-K.

Contracts and Revenue Recognition

We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to

 

10


Table of Contents

the product or activity involved. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress completion as a percentage of the total project. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical, except to assure that no loss will be incurred, as deferred profit recognition contracts.

Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. Under the completed-contract method, income is recognized only when a contract is completed or substantially complete.

For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed.

Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable.

In the three and nine months ended September 30, 2014, we recorded contract losses totaling $0.0 million and $11.6 million, respectively, for additional estimated costs to complete our Power Generation segment’s Berlin Station project. These losses are in addition to contract losses recorded for this project during 2013 and 2012. We had previously asserted that substantial completion had been achieved on this project in early 2014 and that any further delays to complete this project, beyond the delays already caused by the customer during construction or otherwise excusable under the contract, are the result of the customer’s failure to supply fuel complying with the contract specifications. The customer certified that we achieved substantial completion on the project effective July 19, 2014, following which the customer has no further claims for liquidated damages associated with delays. See Note 5 for legal proceedings associated with this matter.

Comprehensive Income

The components of accumulated other comprehensive income included in stockholders’ equity are as follows:

 

     September 30,
2014
    December 31,
2013
 
     (In thousands)  

Currency translation adjustments

   $ 24,439      $ 38,415   

Net unrealized gain on available-for-sale investments

     198        130   

Net unrealized gain on derivative financial instruments

     130        627   

Unrecognized prior service cost on benefit obligations

     (7,525     (10,824
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 17,242      $ 28,348   
  

 

 

   

 

 

 

 

11


Table of Contents

The amounts reclassified out of accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

     
     2014     2013     2014     2013      

Accumulated Other Comprehensive Income

Component Recognized

   (In thousands)    

Line Item Presented

Realized (losses) gains on derivative financial instruments

   $ 373      $ (421   $ 296      $ (1,573   Revenues
     (1,459     977        (1,332     (1,029   Cost of operations
     —          38        10        78      Other-net
  

 

 

   

 

 

   

 

 

   

 

 

   
     (1,086     594        (1,026     (2,524   Total before tax
     279        (158     266        671      Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (807   $ 436      $ (760   $ (1,853   Net Income

Recognition of prior service cost on benefit obligations

   $ (1,794   $ (705   $ (2,812   $ (2,116   Cost of operations
     (1,609     (49     (1,780     (149   Selling, general and administrative expenses
  

 

 

   

 

 

   

 

 

   

 

 

   
     (3,403     (754     (4,592     (2,265   Total before tax
     898        264        1,293        782      Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (2,505   $ (490   $ (3,299   $ (1,483   Net Income

Realized gain on available-for-sale investments

   $ 21      $ 6      $ 62      $ 730      Other-net
     (7     (2     (22     (5   Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 14      $ 4      $ 40      $ 725      Net Income
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassification for the period

   $ (3,298   $ (50   $ (4,019   $ (2,611  
  

 

 

   

 

 

   

 

 

   

 

 

   

Inventories

The components of inventories are as follows:

 

     September 30,
2014
     December 31,
2013
 
     (In thousands)  

Raw materials and supplies

   $ 86,311       $ 85,455   

Work in progress

     11,086         10,872   

Finished goods

     19,136         16,731   
  

 

 

    

 

 

 

Total inventories

   $ 116,533       $ 113,058   
  

 

 

    

 

 

 

Restricted Cash and Cash Equivalents

At September 30, 2014, we had restricted cash and cash equivalents totaling $45.8 million, $5.6 million of which was held in restricted foreign cash accounts, $2.6 million of which was held for future decommissioning of facilities (which is included in other assets on our condensed consolidated balance sheets) and $37.6 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).

Goodwill

Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually. We may elect to perform a qualitative test when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we

 

12


Table of Contents

conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we utilize a two-step quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

The following summarizes the changes in the carrying amount of goodwill:

 

     Power
Generation
    Nuclear
Operations
     Technical
Services
     Nuclear
Energy
     Total  
     (In thousands)  

Balance at December 31, 2013

   $ 104,630      $ 118,103       $ 45,000       $ 13,975       $ 281,708   

Acquisition of MEGTEC and purchase price adjustments (Note 2)

     115,921        —           —           —           115,921   

Foreign currency translation adjustments and other

     (2,328     —           —           —           (2,328
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 218,223      $ 118,103       $ 45,000       $ 13,975       $ 395,301   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Intangible Assets

Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to annual impairment testing. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by quantitatively determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we recognize impairment for the amount of the difference.

Warranty Expense

We accrue estimated expense included in cost of operations on our condensed consolidated statements of income to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

The following summarizes the changes in the carrying amount of our accrued warranty expense:

 

    

Nine Months Ended

September 30,

 
     2014     2013  
     (In thousands)  

Balance at beginning of period

   $ 56,436      $ 83,682   

Additions

     9,970        13,555   

Acquisition of MEGTEC

     4,693        —     

Expirations and other changes

     (1,664     (13,283

Payments

     (9,238     (15,957

Translation and other

     (623     (505
  

 

 

   

 

 

 

Balance at end of period

   $ 59,574      $ 67,492   
  

 

 

   

 

 

 

 

13


Table of Contents

Pension Plans and Postretirement Benefits

We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S. and international subsidiaries. We utilize actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations utilize significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets and health care cost trends. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. The expected rate of return on plan assets assumption is based on capital market assumptions of the long-term expected returns for the investment mix of assets currently in the portfolio. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the classes within the total asset portfolio. Expected health care cost trends represent expected annual rates of change in the cost of health care benefits and are estimated based on analysis of health care cost inflation.

The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year or as interim remeasurements are required, we immediately recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost. Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets.

We recognize the funded status of each plan as either an asset or a liability in the consolidated balance sheets. The funded status is the difference between the fair value of plan assets and the present value of its benefit obligation, determined on a plan-by-plan basis. Our pension plan assets can include assets that are difficult to value. See Note 7 of our 2013 10-K for a detailed description of our plan assets.

Research and Development

Our research and development activities are related to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge research and development costs unrelated to specific contracts as they are incurred. Substantially all of these costs are in our Power Generation and mPower segments, the majority of which are related to the development of our B&W mPowerTM reactor and the associated mPower Plant.

During the three and nine months ended September 30, 2014, we recognized $0.0 million and $5.8 million, respectively, of non-cash, in-kind research and development costs as compared to $3.9 million and $11.3 million during the three and nine months ended September 30, 2013, respectively, related to services contributed by our minority partner to GmP.

On April 12, 2013, Babcock & Wilcox mPower, Inc., a wholly owned subsidiary of B&W, entered into a Cooperative Agreement establishing the terms and conditions of a funding award totaling $150 million under the DOE’s Funding Program. This cost-sharing award requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50% of qualified expenditures incurred from April 1, 2013 to March 31, 2018, subject to funding authorizations. The DOE has authorized $112.9 million of funding to B&W for this award program, with $4.2 million of authorized funds remaining at September 30, 2014. In the nine months ended September 30, 2014 and 2013, we recognized $25.4 million and $54.2 million, respectively, associated with the funding award.

On April 14, 2014, we announced our plans to restructure the mPower program to focus on technology development. Beginning in the third quarter of 2014, we slowed the pace of development and intend to invest no more than $15 million on an annual basis, net of amounts reimbursed from the Funding Program. We intend to work with the DOE to amend the Funding Program, to include, among other things, mutually agreeable program milestones for continued funding and a revised commercial operating date beyond 2022. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.

Provision for Income Taxes

We are subject to U.S. federal income tax and income tax of multiple state and international jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect

 

14


Table of Contents

to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period. We classify interest and penalties related to taxes (net of any applicable tax benefit) as a component of provision for income taxes on our condensed consolidated statements of income.

Our effective tax rate for the three months ended September 30, 2014 was approximately 25.5% as compared to 30.0% for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was lower than our statutory rate and the effective tax rate for the three months ended September 30, 2013, primarily due to the impact of an $18.6 million gain from the exchange of our USEC investment for which the related tax provision was offset by the reversal of a previously established valuation allowance related to the prior impairments of the USEC investment.

Our effective tax rate for the nine months ended September 30, 2014 was approximately 26.7% as compared to 29.0% for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 was lower than our statutory rate primarily due to the receipt of a favorable ruling from the Internal Revenue Service that allows us to amend prior year U.S. income tax returns to exclude distributions of certain of our foreign joint ventures from domestic taxable income. In addition, the effective tax rate for the nine months ended September 30, 2014 was lower due to the $18.6 million gain from the exchange of our USEC investment for which the related tax provision was offset by the reversal of a previously established valuation allowance related to the prior impairments of the USEC investment. Our effective tax rate for the nine months ended September 30, 2013 reflected the impact of certain tax benefits related to the retroactive provisions of the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013. These 2013 tax benefits relate primarily to research and development tax credits.

As of September 30, 2014, we have gross unrecognized tax benefits of $6.9 million, which, if recognized, would lower our effective tax rate from continuing operations.

New Accounting Standards

In August 2014, the Financial Accounting Standards Board issued an update to the Topic Presentation of Financial Statements. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. If there is substantial doubt about an entity’s ability to continue as a going concern, certain disclosures are required. This update will be effective for us in 2017. We do not expect the adoption of this update to have a material impact on our financial statements.

NOTE 2 – ACQUISITIONS AND DISPOSITIONS

MEGTEC Acquisition

On June 20, 2014, we acquired the outstanding stock of industrial processes solutions provider MEGTEC for $142.8 million, net of cash acquired. MEGTEC designs, engineers, manufactures and services air pollution control systems and coating/drying equipment for a variety of industrial applications and is expected to complement our Power Generation segment’s environmental products and solutions offerings that serves utility markets.

 

15


Table of Contents

The purchase price of the acquisition has been allocated among assets acquired and liabilities assumed at preliminary estimates of fair value based on information currently available with the excess purchase price recorded as goodwill. Our preliminary purchase price allocation, as follows, is subject to change upon receipt of additional information and completion of further analysis, including, but not limited to, finalization of long-lived and intangible asset valuations:

 

     MEGTEC
(in thousands)
 

Cash and cash equivalents

   $ 14,232   

Accounts receivable

     23,459   

Inventories

     5,528   

Other current assets

     9,069   

Property, plant and equipment

     5,090   

Goodwill

     115,921   

Intangible assets

     42,000   
  

 

 

 

Total assets acquired

   $ 215,299   
  

 

 

 

Accounts payable

     13,402   

Advance billings on contracts

     9,144   

Other current liabilities

     17,477   

Pension liability

     5,041   

Deferred income taxes

     12,137   

Other liabilities

     1,085   
  

 

 

 

Total liabilities assumed

   $ 58,286   
  

 

 

 

Net assets acquired

   $ 157,013   

Cash and cash equivalents acquired

     14,232   
  

 

 

 

Net assets acquired, net of unrestricted cash acquired

   $ 142,781   
  

 

 

 

Amount of tax deductible goodwill

   $ —     
  

 

 

 

The preliminary intangible assets included above consist of the following (dollar amounts in thousands):

 

     Amount      Amortization Period

Customer relationships

   $ 20,000       7 years

Backlog

   $ 9,500       1 year

Trade names / trademarks

   $ 6,000       15 years

Developed technology

   $ 6,500       10 years

Our condensed consolidated financial statements for the three and nine months ended September 30, 2014 include $48.9 million and $52.5 million of revenues, respectively, and $1.6 million and $1.8 million of net income, respectively, related to MEGTEC operations occurring from the acquisition date to September 30, 2014. Additionally, the following unaudited pro forma financial information presents our results of operations for the three and nine months ended September 30, 2014 and 2013 had the acquisition of MEGTEC occurred on January 1, 2013. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2013. This information is presented for comparative purposes only and should not be taken as representative of our future consolidated results of operations.

 

16


Table of Contents
    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2014      2013      2014      2013  

Revenues

   $ 737,902       $ 822,629       $ 2,166,257       $ 2,591,301   

Net Income Attributable to The Babcock & Wilcox Company

   $ 63,140       $ 60,925       $ 137,670       $ 180,239   

Basic Earnings per Common Share

   $ 0.59       $ 0.55       $ 1.26       $ 1.60   

Diluted Earnings per Common Share

   $ 0.59       $ 0.55       $ 1.26       $ 1.59   

The unaudited pro forma results include the following pre-tax adjustments to the historical results presented above:

 

    Increase (decrease) in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of approximately $(2.4) million and $(1.1) million for the three and nine months ended September 30, 2014, respectively, and $2.8 million and $8.4 million for the three and nine months ended September 30, 2013, respectively.

 

    Elimination of historical interest expense of approximately $0.9 million for the nine months ended September 30, 2014, and $1.0 million and $1.9 million for the three and nine months ended September 30, 2013, respectively.

 

    Additional interest expense associated with the incremental borrowings that would have been incurred to acquire MEGTEC as of January 1, 2013 of approximately $1.2 million for the nine months ended September 30, 2014, and $0.6 million and $1.9 million for the three and nine months ended September 30, 2013, respectively.

 

    Elimination of $0.6 million and $14.1 million, respectively, in acquisition related costs recognized in the three and nine months ended September 30, 2014 that are not expected to be recurring.

Ebensburg Acquisition

On May 21, 2014, we acquired the remaining outstanding interest in Ebensberg Power Company for a purchase price of $1.3 million. As part of the transaction, we acquired cash of $16.4 million and property, plant and equipment with a fair value of $16.1 million.

Nuclear Projects Business Disposition

In the first quarter of 2014, we announced that we would exit our Nuclear Energy segment’s Nuclear Projects business as it had lower margins and higher financial risks. Run-off operations for remaining projects were completed during the quarter ended June 30, 2014. Income (loss) before provision for income taxes for the Nuclear Projects business was $0.0 million and $(0.2) million in the three and nine months ended September 30, 2014, respectively, and $(0.6) million and $(1.6) million in the three and nine months ended September 30, 2013, respectively.

At September 30, 2014, assets recorded within the condensed consolidated financial statements for the Nuclear Projects business include $45.4 million in outstanding accounts receivable. This amount relates to a reimbursable target cost subcontract pursuant to which we performed steam generator replacement installation services for the prime contractor. All work under that subcontract has been completed. The customer has questioned the reasonableness of certain project costs, asserted liquidated damages and has not paid the prime contractor the referenced amounts invoiced under the prime contract. Based upon the terms of the subcontract, the prime contractor has not yet paid us. We filed a mechanic’s lien in the amount of $37.4 million on July 11, 2014, which represented the outstanding accounts receivable balance at the time, against the owner’s property in order to preserve our statutory legal rights, and we have until early March 2015 to file suit against the owner to foreclose on that lien. We contend that the invoiced amounts were reasonably incurred under the terms of the subcontract and that project delays and additional costs are attributable to the owner. Payment of all amounts currently due and owing is being sought from the prime contractor through the defined subcontract dispute resolution processes. If those efforts are unsuccessful, we will have the right to initiate collection litigation against the prime contractor.

 

 

17


Table of Contents

NOTE 3 – SPECIAL CHARGES FOR RESTRUCTURING ACTIVITIES

Global Competitiveness Initiative

In the third quarter of 2012, we announced the Global Competitiveness Initiative (“GCI”) to enhance competitiveness, better position B&W for growth and improve profitability. In conjunction with GCI, during the nine months ended September 30, 2014, we incurred $0.2 million of expenses related to employee termination benefits and $3.1 million of expenses related to facility consolidation. During the nine months ended September 30, 2013, we reduced our workforce and initiated other actions, resulting in $15.8 million of expenses related to employee termination benefits, $8.1 million of expenses related to consulting and GCI administrative costs, and $1.6 million of expenses related to facility consolidation charges.

Other Restructuring Actions

In the first quarter of 2014, we announced a margin improvement program in our Power Generation and Nuclear Energy segments. In the nine months ended September 30, 2014, we incurred $16.9 million of expenses related to this project, including $9.3 million of expenses related to employee termination benefits, $2.2 million of expenses related to consulting and administrative costs and $5.4 million of expenses related to facility consolidation.

In the nine months ended September 30, 2014, we also incurred $8.2 million of expenses related to the restructuring of our mPower program, including $5.8 million of expenses related to employee termination benefits, $2.2 million of expenses related to consulting and administrative costs and $0.2 million of expenses related to facility consolidation.

Additionally, we incurred expenses related to employee termination benefits totaling $0.4 million for the nine months ended September 30, 2014 related to the restructuring of our Technical Services segment.

The following summarizes the changes in our restructuring liability for the nine months ended September 30, 2014 and 2013:

 

     Nine Months Ended  
     September 30,
2014
    September 30,
2013
 
     (In thousands)  

Balance at the beginning of the period

   $ 10,054      $ —     

Special charges for restructuring activities(1)

     22,108        24,497   

Payments

     (24,572     (20,727

Translation and other

     (204     —     
  

 

 

   

 

 

 

Balance at the end of the period

   $ 7,386      $ 3,770   
  

 

 

   

 

 

 

 

(1) Excludes non-cash charges of $6.7 million and $1.0 million for the nine months ended September 30, 2014 and 2013, respectively, which did not impact the restructuring liability.

At September 30, 2014, unpaid restructuring charges totaled $6.5 million for employee termination benefits and $0.9 million for consulting and administrative costs.

 

 

18


Table of Contents

NOTE 4 – PENSION PLANS AND POSTRETIREMENT BENEFITS

Components of net periodic benefit cost included in net income are as follows:

 

     Pension Benefits     Other Benefits  
     Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2014     2013     2014     2013     2014     2013     2014     2013  
     (In thousands)  

Service cost

   $ 9,305      $ 11,505      $ 28,602      $ 34,625      $ 217      $ 246      $ 649      $ 742   

Interest cost

     29,980        27,624        90,668        83,250        978        946        2,924        2,844   

Expected return on plan assets

     (37,314     (36,560     (112,080     (109,841     (575     (538     (1,725     (1,613

Amortization of prior service cost (credit)

     637        790        1,906        2,374        (40     (36     (120     (109

Recognized net actuarial loss

     11,079        —          11,079        —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 13,687      $ 3,359      $ 20,175      $ 10,408      $ 580      $ 618      $ 1,728      $ 1,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended September 30, 2014, benefit accruals under certain hourly Canadian pension plans were ceased with an effective date of January 1, 2015. In addition, significant lump sum payments were made from certain salaried Canadian pension plans during the nine months ended September 30, 2014. As a result of these actions, we remeasured certain of our Canadian pension plans resulting in the recognition of a net actuarial loss of $11.1 million, which includes $5.5 million in actuarial losses, a $4.6 million settlement loss and a $1.0 million curtailment loss. We have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in Note 9 as the Mark to Market Adjustment in the reconciliation of reportable segment income to consolidated operating income. We recorded $4.9 million of the net actuarial loss within cost of operations and $6.2 million of the loss within selling, general and administrative expenses.

We made contributions to our pension and postretirement benefit plans totaling $36.2 million and $63.2 million during the three and nine months ended September 30, 2014, respectively, as compared to $28.3 million and $71.5 million in the three and nine months ended September 30, 2013, respectively.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Other than as noted below, there have been no material changes during the period covered by this Form 10-Q in the status of the legal proceedings disclosed in Note 11 to the consolidated financial statements in Part II of our 2013 10-K.

Investigations and Litigation

Apollo and Parks Township

In January 2010, Michelle McMunn, Cara D. Steele and Yvonne Sue Robinson filed suit against Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), Babcock & Wilcox Technical Services Group, Inc., formerly known as B&W Nuclear Environmental Services, Inc., (the “B&W Parties”) and Atlantic Richfield Company (“ARCO”) in the United States District Court for the Western District of Pennsylvania. Since January 2010, additional suits have been filed by additional plaintiffs and there are currently fifteen lawsuits pending in the U.S. District Court for the Western District of Pennsylvania against the B&W Parties and ARCO, including the most recent claims filed in May 2014. In total, the suits presently involve approximately 93 primary claimants, including the five additional primary claims filed in May 2014. The primary claimants allege, among other things, personal injuries and property damage as a result of alleged releases of radioactive material relating to the operation, remediation, and/or decommissioning of two former nuclear fuel processing facilities located in the Borough of Apollo and Parks Township, Pennsylvania (collectively, the “Apollo and Parks Litigation”). Those facilities previously were owned by Nuclear Materials and Equipment Company, a former subsidiary of ARCO (“NUMEC”), which was acquired by B&W PGG. The plaintiffs in the Apollo and Parks Litigation seek compensatory and punitive damages. All of the suits, except for the most recent filing, have been consolidated for non-dispositive pre-trial matters. Fact discovery in the Apollo and Parks Litigation is now closed, but no trial date has been set.

 

 

19


Table of Contents

At the time of ARCO’s sale of NUMEC stock to B&W PGG, B&W PGG received an indemnity and hold harmless agreement from ARCO with respect to claims and liabilities arising prior to or as a result of conduct or events predating the acquisition.

Insurance coverage and/or the ARCO indemnity currently provides coverage for the claims alleged in the Apollo and Parks Litigation, although no assurance can be given that insurance and/or the indemnity will be available or sufficient in the event of liability, if any.

The B&W Parties and ARCO were defendants in a prior litigation filed in 1994 relating to the operation of the Apollo Borough and Parks Township facilities in the matter of Donald F. Hall and Mary Ann Hall, et al., v. Babcock & Wilcox Company, et al. (the “Hall Litigation”). In 1998, the B&W Parties settled all then-pending and future punitive damage claims in the Hall Litigation for $8.0 million and sought reimbursement from third parties, including its insurers, American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (“ANI”). In 2008, ARCO settled the Hall Litigation with the plaintiffs for $27.5 million. The B&W Parties then settled the Hall Litigation in 2009 for $52.5 million, settling approximately 250 personal injury and wrongful death claims, as well as approximately 125 property damage claims, alleging damages as a result of alleged releases involving the facilities. ARCO and the B&W Parties retained their insurance rights against ANI in their respective settlements; however, under a related settlement regarding ARCO’s indemnification of B&W PGG relating to the two facilities, ARCO assigned to the B&W Parties 58.33% of the total of all ARCO’s proceeds/amounts recovered against ANI on account of the Hall Litigation.

The B&W Parties sought recovery from ANI for amounts paid by the B&W Parties to settle the Hall Litigation, along with unreimbursed attorney fees, allocated amounts assigned by ARCO to the B&W Parties, and applicable interest based upon ANI’s breach of contract and bad faith conduct in the matter of The Babcock & Wilcox Company et al. v. American Nuclear Insurers, et al. (the “ANI Litigation”). ARCO also sought recovery against ANI in the ANI Litigation, which has been pending before the Court of Common Pleas of Allegheny County, Pennsylvania.

In September 2011, a jury returned a verdict in the ANI Litigation, finding that the B&W Parties’ settlement of the Hall Litigation for $52.5 million and ARCO’s settlement for $27.5 million were fair and reasonable. Following the verdict, in February 2012, the B&W Parties, ARCO and ANI entered into an agreement in which the parties agreed to the dismissal with prejudice of all remaining claims pending in the ANI Litigation, excluding the B&W Parties’ and ARCO’s claims seeking reimbursement from ANI for the $52.5 million and $27.5 million settlements (plus interest) (the “Settlement Claims”). By agreement, ANI also waived: (1) any and all rights to appeal the September 2011 jury verdict on the basis of the trial court’s evidentiary rulings; and (2) any defenses and arguments of any kind except ANI’s position that it was not required to reimburse the B&W Parties’ and ARCO for their settlements under the provisions of the ANI policies. In February 2012, the Court granted the parties’ proposed order implementing their agreement and entered final judgment in favor of the B&W Parties and ARCO on the Settlement Claims. As part of the final order and judgment, the Court ruled that the B&W Parties and ARCO are entitled to pre-judgment interest on their $52.5 million and $27.5 million settlements, in the amounts of approximately $8.8 million and $6.2 million, respectively. In addition, post-verdict interest from the date of the jury verdict was awarded at 6%. In March 2012, ANI filed a notice of appeal as to the final judgment and a supersedeas appeal bond in the amount of 120% of the total final judgment amount. The parties filed their respective briefs with the Superior Court and oral arguments were held October 31, 2012.

In July 2013, the Superior Court reversed the judgment of the trial court with instructions to reconsider the issue of the Settlement Claims under a different standard. In August 2013, B&W and ARCO filed a request for appeal of the Superior Court’s decision to the Pennsylvania Supreme Court. On January 24, 2014, the Supreme Court of Pennsylvania granted B&W and ARCO’s request for appeal. The parties’ briefs on the appeal have been filed and oral arguments were held October 7, 2014. B&W has not recognized any amounts claimed in the ANI Litigation in its financial statements due to the uncertainty surrounding the ultimate amount to be realized.

Berlin Station

Our subsidiary, Babcock & Wilcox Construction Co., Inc. (“BWCC”), is currently in a dispute with a customer in connection with a 75MW biomass-energy power plant that BWCC designed and built in Berlin, New Hampshire. The dispute primarily concerns material claims by BWCC against its customer for contract changes relating to schedule delays, delay costs, extra work, withheld payments, improper draws on letters of credit and withheld contract retention amounts. The customer has made nine partial draws totaling approximately $11.0 million under letters of credit that were outstanding in connection with the project. These draws correspond to a total of approximately $11.9 million in alleged liquidated damages for delay (“Delay LDs”) on the project.

 

20


Table of Contents

Following the customer’s denial of BWCC’s change order request relating to schedule delays, delay costs and extra work incurred up to that time, on January 16, 2014, BWCC filed suit against the customer in the Court of Common Pleas, Summit County, Ohio, Case No. 2014 01 0208, seeking damages in excess of $37 million (the “Ohio suit”). On or about January 30, 2014, BWCC’s customer filed suit against BWCC in the Superior Court of Coos County, New Hampshire, Case No. 214-2014-CV-14 alleging breach of contract and seeking unspecified amounts (the “New Hampshire suit”). On June 26, 2014, the Ohio suit was dismissed on jurisdictional and forum non conveniens grounds. On August 29, 2014, BWCC filed its Answer, Affirmative Defenses and Counterclaim in the New Hampshire suit seeking recovery of damages incurred to date of at least $66 million in connection with all matters currently in dispute.

There is a risk that the customer will attempt to call all or part of the remaining $21.9 million of letters of credit during the pendency of this matter. We believe any such call would be wrongful and entitle us to return of the funds and other damages. We have made provisions in our financial statements for Delay LDs called to date against the letters of credit and have not recorded offsetting claims revenue related to these calls in our financial statements.

We believe BWCC has sound legal and factual bases for its claims. BWCC intends to aggressively pursue recovery on its claims, including recovery of the wrongful calls against BWCC’s letters of credit. However, it is premature to predict the outcome of this matter. The litigation could be lengthy, and if BWCC’s customer were to prevail completely or substantially in this matter, the outcome could have a material adverse effect on our financial statements.

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

Our global operations give rise to exposure to market risks from changes in foreign currency exchange (“FX”) rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities’ functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes.

We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated balance sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders’ equity as a component of accumulated other comprehensive income until the hedged item is recognized in earnings, or offset against the change in fair value of the hedged firm commitment through earnings. Any ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in other – net on our condensed consolidated statements of income. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of other– net in our condensed consolidated statements of income.

We have designated all of our FX forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At September 30, 2014, we had deferred approximately $0.1 million of net gains on these derivative financial instruments in accumulated other comprehensive income. Assuming market conditions continue, we expect to recognize substantially all of this amount in the next twelve months.

At September 30, 2014, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $75.7 million at September 30, 2014, with maturities extending to December 2016. These instruments consist primarily of contracts to purchase or sell Canadian Dollars. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions included in our credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our credit facility.

 

21


Table of Contents

The following tables summarize our derivative financial instruments at September 30, 2014 and December 31, 2013:

 

     Asset and Liability Derivatives  
     September 30,
2014
     December 31,
2013
 
     (In thousands)  

Derivatives Designated as Hedges:

     

FX Forward Contracts:

     
Location      

Accounts receivable-other

   $ 3       $ 1,139   

Other assets

   $ 256       $ 94   

Accounts payable

   $ 1,904       $ 581   

Other liabilities

   $ 534       $ 603   

Derivatives Not Designated as Hedges:

     

FX Forward Contracts:

     
Location      

Accounts receivable-other

   $ 173       $ 464   

Other assets

   $ 46       $ 50   

Accounts payable

   $ 310       $ 10   

The effects of derivatives on our financial statements are outlined below:

 

     The Effects of Derivative Instruments on our Financial Statements  
     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (In thousands)  

Derivatives Designated as Hedges:

        

Cash Flow Hedges:

        

FX Forward Contracts:

        

Amount of gain (loss) recognized in other comprehensive income

   $ (1,501   $ 1,266      $ (1,693   $ (3,944

Gain (loss) reclassified from accumulated other comprehensive income into earnings: effective portion

        
Location   

Revenues

   $ 373      $ (421   $ 296      $ (1,573

Cost of operations

   $ (1,459   $ 977      $ (1,332   $ (1,029

Other-net

   $ —        $ 38      $ 10      $ 78   

Gain (loss) recognized in income: portion excluded from effectiveness testing

        
Location   

Other-net

   $ (346   $ 169      $ (68   $ 522   

Derivatives Not Designated as Hedges:

        

FX Forward Contracts:

        

Gain (loss) recognized in income

        
Location   

Other-net

   $ (210   $ 352      $ (55   $ (231

 

22


Table of Contents

NOTE 7 – FAIR VALUE MEASUREMENTS

Investments

The following is a summary of our investments measured at fair value at September 30, 2014 (in thousands):

 

     9/30/14      Level 1      Level 2      Level 3  

Trading securities

           

Corporate bonds

   $ 11,313       $ 11,313       $ —         $ —     

Available-for-sale securities

           

Equities

   $ 7,333       $ —         $ 7,333       $ —     

Mutual funds

     4,137         —           4,137         —     

Asset-backed securities and collateralized mortgage obligations

     346         —           346         —     

Commercial paper

     400         —           400      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,529       $ 11,313       $ 12,216       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of our available-for-sale securities measured at fair value at December 31, 2013 (in thousands):

 

     12/31/13      Level 1      Level 2      Level 3  

Mutual funds

   $ 4,001       $ —         $ 4,001       $ —     

U.S. Government and agency securities

     3,000         3,000         —           —     

Asset-backed securities and collateralized mortgage obligations

     425         —           425         —     

Commercial paper

     7,748         —           7,748         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,174       $ 3,000       $ 12,174       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

We estimate the fair value of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms.

Centrus Energy Corp. Transaction

On September 5, 2014, the Bankruptcy Court for the District of Delaware approved and confirmed the proposed voluntary Chapter 11 pre-packaged or pre-arranged plan of reorganization of USEC (the “Plan”). USEC Inc. completed the final steps necessary to emerge from its Chapter 11 bankruptcy on September 30, 2014. The reorganized company is called Centrus Energy Corp. and trades on the NYSE under the symbol LEU. Under the Plan, B&W received 7.98% of the Centrus Energy Corp. common stock and approximately $20.2 million in principal amount of 8.0% PIK Toggle Notes due 2019/2024 in exchange for its investment in USEC Series B-1 12.75% Convertible Preferred Stock and Warrants. We recorded a gain in other income of $18.6 million for the fair value of the Centrus Energy Corp. common stock and notes, which were trading at a discount to par value, at September 30, 2014.

Derivatives

Level 2 derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. At September 30, 2014 and December 31, 2013, we had forward contracts outstanding to purchase or sell foreign currencies, primarily Canadian Dollars, with a total fair value of $(2.3) million and $0.6 million, respectively.

 

23


Table of Contents

Other Financial Instruments

We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments, as follows:

Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying condensed consolidated balance sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.

Long-term and short-term debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instruments approximated their carrying value at September 30, 2014 and December 31, 2013.

Guarantee. In the third quarter of 2014, B&W issued a letter of credit with a four year term totaling approximately $10 million in support of a bank loan borrowed by Thermax Babcock & Wilcox Energy Solutions Private Limited (“TBWES”). TBWES is an unconsolidated affiliate and the letter of credit can be drawn if TBWES defaults on the loan. The fair value of the guarantee is not material.

NOTE 8 – STOCK-BASED COMPENSATION

Total stock-based compensation expense for all of our plans recognized for the three and nine months ended September 30, 2014 totaled $4.3 million and $12.1 million, respectively, with associated tax benefit recognized for the three and nine months ended September 30, 2014 totaling $1.6 million and $4.6 million, respectively.

Total stock-based compensation expense for all of our plans recognized for the three and nine months ended September 30, 2013 totaled $4.5 million and $14.2 million, respectively, with associated tax benefit recognized for the three and nine months ended September 30, 2013 totaling $1.8 million and $5.5 million, respectively.

 

24


Table of Contents

NOTE 9 – SEGMENT REPORTING

As described in Note 1, our operations are assessed based on five reportable segments. An analysis of our operations by reportable segment is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (In thousands)  

REVENUES:

        

Power Generation

   $ 402,016      $ 426,960      $ 1,041,473      $ 1,359,614   

Nuclear Operations

     297,489        282,120        877,141        874,245   

Technical Services

     20,236        25,242        70,706        77,903   

Nuclear Energy

     21,529        52,470        114,236        179,171   

mPower

     —          343        278        980   

Adjustments and Eliminations(1)

     (3,368     (12,301     (17,909     (25,520
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 737,902      $ 774,834      $ 2,085,925      $ 2,466,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) Segment revenues are net of the following intersegment transfers and other adjustments:

  

Power Generation Transfers

   $ 1,193      $ 9,027      $ 5,413      $ 11,327   

Nuclear Operations Transfers

     1,911        1,485        6,878        4,301   

Technical Services Transfers

     2        1,120        55        2,669   

Nuclear Energy Transfers

     262        669        5,563        7,223   

mPower Transfers

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,368      $ 12,301      $ 17,909      $ 25,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME:

        

Power Generation

   $ 35,260      $ 38,348      $ 61,017      $ 102,213   

Nuclear Operations

     61,893        63,819        180,103        184,280   

Technical Services

     4,951        18,398        34,818        47,812   

Nuclear Energy

     (6,698     21        (4,627     10,201   

mPower

     (5,140     (25,576     (63,782     (53,627
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 90,266      $ 95,010      $ 207,529      $ 290,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unallocated Corporate(1)

     (5,352     (8,040     (13,729     (24,335

Special Charges for Restructuring Activities

     (8,675     (4,849     (28,803     (25,504

Mark to Market Adjustment

     (11,079     —          (11,079     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income(2)

   $ 65,160      $ 82,121      $ 153,918      $ 241,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense):

        

Interest income

     267        480        876        1,135   

Interest expense

     (2,978     (631     (4,798     (2,238

Other – net

     18,625        (533     20,527        1,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expense)

     15,914        (684     16,605        775   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before Provision for Income Taxes

   $ 81,074      $ 81,437      $ 170,523      $ 241,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) Unallocated corporate includes general corporate overhead not allocated to segments.

  

(2) Included in operating income is the following:

  

(Gains) Losses on Asset Disposals and Impairments – Net:

  

Power Generation

   $ 19      $ 1,255      $ 1,476      $ 1,170   

Nuclear Operations

     —          —          —          163   

Technical Services

     —          —          —          —     

Nuclear Energy

     (619     3        (619     12   

mPower

     —          —          —          —     

Corporate

     (5     —          (5     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (605   $ 1,258      $ 852      $ 1,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Income of Investees:

  

Power Generation

   $ 2,859      $ 3,287      $ 5,659      $ 10,596   

Nuclear Operations

     —          —          —          —     

Technical Services

     4,419        15,063        30,069        41,595   

Nuclear Energy

     30        (199     32        (478

mPower

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,308      $ 18,151      $ 35,760      $ 51,713   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

NOTE 10 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
September 30,
    

Nine Months Ended

September 30,

 
     2014      2013      2014      2013  
     (In thousands, except share and per share amounts)  

Basic:

           

Net income attributable to The Babcock & Wilcox Company

   $ 61,214       $ 60,446       $ 132,695       $ 180,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares

     107,105,986         110,931,376         109,103,879         112,309,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.57       $ 0.54       $ 1.22       $ 1.61   

Diluted:

           

Net income attributable to The Babcock & Wilcox Company

   $ 61,214       $ 60,446       $ 132,695       $ 180,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares (basic)

     107,105,986         110,931,376         109,103,879         112,309,170   

Effect of dilutive securities:

           

Stock options, restricted stock and performance shares(1)

     338,298         818,005         378,439         740,530   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares

     107,444,284         111,749,381         109,482,318         113,049,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.57       $ 0.54       $ 1.21       $ 1.60   

 

(1) At September 30, 2014 and 2013, we have excluded from our diluted share calculation 1,342,544 and 525,716 shares, respectively, related to stock options, as their effect would have been antidilutive.

NOTE 11 – SUBSEQUENT EVENT

On October 1, 2014, B&W announced that its Board of Directors was evaluating the separation of B&W’s Power Generation business and its Government & Nuclear Operations business into two publicly traded companies. On November 5, 2014, B&W announced that its Board of Directors had approved a plan to pursue a separation of B&W’s Power Generation business and its Government & Nuclear Operations business through a spinoff, creating a new independent, publicly traded power generation company. The transaction is expected to be tax-free to shareholders and should be completed by mid-summer of 2015, subject to various conditions, including the effectiveness of the SEC filings, regulatory review by the Nuclear Regulatory Commission and final approval by B&W’s Board of Directors.

 

26


Table of Contents

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 of this report and the audited consolidated financial statements and the related notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2013 (our “2013 10-K”).

In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean The Babcock & Wilcox Company (“B&W”) and its consolidated subsidiaries.

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords.

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “seek,” “goal,” “could,” “intend,” “may,” “should” or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

These forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

 

    our business strategy;

 

    future levels of revenues (including our backlog and projected claims to the extent either may be viewed as an indicator of future revenues), operating margins, income from operations, net income or earnings per share;

 

    anticipated levels of demand for our products and services;

 

    future levels of research and development, capital, environmental or maintenance expenditures;

 

    our beliefs regarding the timing and effects on our businesses of certain environmental and tax legislation, rules or regulations;

 

    the success or timing of completion of ongoing or anticipated capital or maintenance projects;

 

    expectations regarding the acquisition or divestiture of assets and businesses;

 

    our share repurchase program or other return of capital activities;

 

    our ability to maintain appropriate insurance and indemnities;

 

    the potential effects of judicial or other proceedings, including tax audits, on our business or businesses, financial condition, results of operations and cash flows;

 

    the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation;

 

    the effective date and expected impact of accounting pronouncements;

 

    our plans regarding the design, research and development, financing and deployment of the B&W mPowerTM reactor and related DOE funding program; and

 

    anticipated benefits, timing of charges and changes associated with cost reduction and margin improvement activities.

In addition, various statements in this quarterly report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements.

We have based our forward-looking statements on our current expectations, estimates and projections about our industries and our company. We caution that these statements are not guarantees of future performance and you should not rely unduly on them, as they involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. While our management considers these assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in our forward-looking statements.

 

27


Table of Contents

Differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors, including the following:

 

    decisions on spending and trends by power-generating companies and by the U.S. Government, including continuing appropriations by Congress and the automatic budget cuts (or sequestration) established by the Budget Control Act of 2011;

 

    the highly competitive nature of our businesses;

 

    general economic and business conditions, including changes in interest rates and currency exchange rates;

 

    general developments in the industries in which we are involved;

 

    cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings;

 

    our ability to perform projects on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers;

 

    changes in our effective tax rate and tax positions;

 

    our ability to maintain operational support for our information systems against service outages and data corruption, as well as protection against cyber-based network security breaches and theft of data;

 

    our ability to protect our intellectual property and renew licenses to use intellectual property of third parties;

 

    changes in estimates used in the percentage-of-completion method of accounting;

 

    our ability to obtain and maintain surety bonds, letters of credit and similar financing;

 

    the operating risks normally incident to our lines of business, including the potential impact of project losses, liquidated damages and professional liability, product liability, warranty and other claims against us;

 

    our ability to manage our capital structure, including our access to capital, credit ratings, debt and ability to raise additional financing;

 

    our ability to comply with covenants in our credit agreements and other debt instruments and the availability, terms and deployment of capital;

 

    volatility and uncertainty of the credit markets;

 

    our ability to successfully manage research and development projects and costs, including our efforts to successfully develop and commercialize new technologies and products;

 

    risks associated with our restructuring of the mPower program, including the risk that we do not receive or experience delays in receiving funding from the Department of Energy (“DOE”) and the risk of exposure to claims of contractual and other liability from our current partner, customer or others;

 

    the risks associated with integrating businesses we acquire;

 

    our ability to obtain and maintain builder’s risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical;

 

    the aggregated risks retained in our captive insurance subsidiary;

 

    the effects of asserted and unasserted claims;

 

    results of tax audits, including a determination by the Internal Revenue Service that our spin-off from McDermott International, Inc. or certain other transactions should be treated as a taxable transaction, and the realization of deferred tax assets;

 

    changes in, and liabilities relating to, existing or future environmental matters and regulations, including with respect to our operations that involve the handling, transportation and disposal of radioactive or hazardous materials;

 

    changes in, or our failure or inability to comply with, laws and governmental regulations;

 

    difficulties we may encounter in obtaining regulatory or other necessary permits or approvals;

 

    adverse outcomes from legal and regulatory proceedings;

 

    our limited ability to influence and direct the operations of our joint ventures;

 

    potential violations of the Foreign Corrupt Practices Act;

 

    our ability to successfully compete with current and future competitors;

 

    the loss of key personnel and the continued availability of qualified personnel;

 

    our inability to realize expected benefits from our Global Competitiveness Initiative and other cost reduction initiatives;

 

    our ability to negotiate and maintain good relationships with labor unions;

 

    changes in pension and medical expenses associated with our retirement benefit programs;

 

    potentially inadequate systems of internal controls over financial reporting;

 

    the ability of our suppliers to deliver raw materials in sufficient quantities and in a timely manner;

 

    social, political and economic situations in foreign countries where we do business;

 

28


Table of Contents
    the possibilities of natural disasters, war, other armed conflicts or terrorist attacks; and

 

    our ability to complete the spin-off within the expected time frame or at all, and without significant disruption to our business.

We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in Item 1A in our 2013 10-K. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

GENERAL

We operate in five segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. In general, we operate in capital-intensive industries and rely on large contracts for a substantial amount of our revenues. We are currently exploring growth strategies across our segments through acquisitions to expand and complement our existing businesses. We would expect to fund these opportunities by cash on hand, external financing (including debt), equity or some combination thereof.

Power Generation Segment

Our Power Generation segment’s overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. Several factors influence these expenditures, including:

 

    prices for electricity, along with the cost of production and distribution;

 

    prices for coal and natural gas and other sources used to produce electricity;

 

    demand for electricity, paper and other end products of steam-generating facilities;

 

    availability of other sources of electricity, paper or other end products;

 

    requirements for environmental improvements;

 

    impact of potential regional, state, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future;

 

    level of capacity utilization at operating power plants, paper mills and other steam-using facilities;

 

    requirements for maintenance and upkeep at operating power plants and paper mills to comply with environmental regulations and combat the accumulated effects of wear and tear;

 

    ability of electric power generating companies and other steam users to raise capital; and

 

    relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation.

Our Power Generation segment plans to continue efforts to expand international offerings through acquisitions and partnering arrangements. On June 20, 2014, we completed the acquisition of MEGTEC Holdings, Inc. (“MEGTEC”). MEGTEC designs, engineers, manufactures and services air pollution control systems and coating / drying equipment for a variety of industrial applications and is expected to complement our environmental products and solutions offerings.

Nuclear Operations Segment

The revenues of our Nuclear Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry.

On June 13, 2014, a uranium conversion company filed suit against the Secretary of Energy seeking, among other things, to enjoin the DOE from transferring portions of its excess uranium stockpile to support non-proliferation and other national security initiatives, as well as fund environmental clean-up work and other initiatives. On July 29, 2014, a motion for preliminary injunction was denied. However, the suit may still be successful in preventing the DOE’s transfer of excess uranium, which could adversely impact results in our Nuclear

 

29


Table of Contents

Operations and Technical Services segments. These activities contributed approximately $11 million and $6 million of operating income to our Nuclear Operations and Technical Services segments, respectively, during fiscal year 2013.

Technical Services Segment

The revenues and equity in income of investees of our Technical Services segment are largely a function of spending by the U.S. Government and the performance scores we and our consortium partners earn in managing and operating high-consequence operations at U.S. nuclear weapons sites and national laboratories. With its specialized capabilities of full life-cycle management of special nuclear materials, facilities and technologies, our Technical Services segment participates in the cleanup, operation and management of the nuclear sites and weapons complexes maintained by the DOE.

Nuclear Energy Segment

Our Nuclear Energy segment’s overall activity depends mainly on the demand and competitiveness of nuclear energy. The activity of this segment depends on capital expenditures and maintenance spending of nuclear utilities. Factors such as price of electricity, along with the cost of production and distribution influence these expenditures. A significant portion of this segment’s activities is generated from the Canadian nuclear market, which could cause variability in our financial results depending on the level of maintenance and capital spending of Canadian utilities in a given year.

mPower Segment

This segment is developing the B&W mPowerTM reactor and the associated mPower Plant through its majority-owned joint venture, Generation mPower LLC. Its activity is a function of research and development efforts for the B&W mPowerTM reactor and the potential orders to be generated from various mPower Plant deployment initiatives. As part of this initiative, we were selected to receive funding and have signed a Cooperative Agreement with the DOE under its Small Modular Reactor Licensing Technical Support Program (“Funding Program”), which is expected to provide financial assistance initially totaling at least $150 million for small modular reactor (“SMR”) design engineering and licensing activities supporting the planned first mPower Plant.

The Funding Program is a cost-sharing award, which requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50% of qualified expenditures incurred from April 1, 2013 to March 31, 2018, subject to funding authorizations. The DOE has authorized $112.9 million of funding to B&W for this award program, with $4.2 million of authorized funds remaining. In the nine months ended September 30, 2014 and 2013, we recognized $25.4 million and $54.2 million, respectively, associated with the funding award.

On April 14, 2014, we announced our plans to restructure the mPower program to focus on technology development. Beginning in the third quarter of 2014, we slowed the pace of development and intend to invest no more than $15 million on an annual basis, net of amounts reimbursed from the Funding Program. As a result of our plans to restructure the mPower program, our operating income was negatively impacted by $21.5 million for the nine months ended September 30, 2014, consisting of $8.2 million of special charges for restructuring activities as further discussed below and $13.3 million of unrecognized cost-share due to limited additional authorized funding by the DOE under the Funding Program. We intend to work with the DOE to amend the Funding Program to include, among other things, mutually agreeable program milestones for continued funding and a revised commercial operating date beyond 2022. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.

Power Generation Spin-off

On October 1, 2014, B&W announced that its Board of Directors was evaluating the separation of B&W’s Power Generation business and its Government & Nuclear Operations business into two publicly traded companies. On November 5, 2014, B&W announced that its Board of Directors had approved a plan to pursue a separation of B&W’s Power Generation business and its Government & Nuclear Operations business through a spinoff, creating a new independent, publicly traded power generation company. The transaction is expected to be tax-free to shareholders and should be completed by mid-summer of 2015, subject to various conditions, including the effectiveness of the SEC filings, regulatory review by the Nuclear Regulatory Commission and final approval by B&W’s Board of Directors.

 

30


Table of Contents

Global Competitiveness Initiative and Other Restructuring Activities

We launched the Global Competitiveness Initiative (“GCI”) in the third quarter of 2012 to enhance competitiveness, better position B&W for growth, and improve profitability. We have identified a wide range of cost reduction activities including operational and functional efficiency improvements, organizational design changes and manufacturing optimization. Once fully executed, these actions are expected to produce at least $75 million in annual savings. The majority of the annual savings are expected to result from efficiency improvements that were completed in 2013. The balance of the cost savings relates to manufacturing initiatives that are expected to be completed by mid-2015. In order to achieve these savings, we expect to incur total restructuring charges (cash and non-cash) of approximately $60 million. We incurred $3.3 million and $25.5 million of costs associated with GCI for the nine months ended September 30, 2014 and 2013, respectively.

We continue to focus on structural changes in our operating model to drive significant margin improvement. We are targeting initiatives that we expect, in conjunction with our GCI initiatives, to drive margin improvement in our Power Generation segment by 200 to 300 basis points and allow us to achieve a minimum 10% operating margin in our Nuclear Energy segment by the end of 2015. We incurred $16.9 million of costs associated with these initiatives for the nine months ended September 30, 2014. We expect these actions to result in additional restructuring charges.

In addition, in the nine months ended September 30, 2014, we incurred $8.2 million and $0.4 million of costs associated with the restructuring of our mPower program and our Technical Services segment, respectively.

Critical Accounting Policies and Estimates

Goodwill and Intangible Assets. Each year, we evaluate goodwill at each reporting unit to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative analysis when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant facts and circumstances that could affect fair value. Deterioration in macroeconomic, industry and market conditions, cost factors, overall financial performance, share price decline or entity and reporting unit specific events could cause us to determine a qualitative test is no longer appropriate.

When we determine that it is appropriate to test goodwill for impairment utilizing a quantitative test, the first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill. We utilize both the income and market valuation approaches to provide inputs into the estimate of the fair value of our reporting units, which would be considered by market participants.

Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. Actual results could differ from our projections. Some assumptions, such as future revenues, costs and changes in working capital are company driven and could be affected by a loss of one or more significant contracts or customers; failure to control costs on certain contracts; a decline in U.S. Government funding; or a decline in demand based on changing economic or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control.

Under the market valuation approach, we employ the guideline publicly traded company method, which indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. After identifying and selecting guideline companies, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units. Assumptions include the selection of our peer companies and use of market multiples, which could deteriorate or increase based on the profitability of our competitors and performance of their stock, which is often dependent on the performance of the stock market and general economy as a whole.

 

31


Table of Contents

Adverse changes in these assumptions utilized within the first step of our impairment test could cause a reduction or elimination of excess fair value over carrying value, resulting in potential recognition of impairment. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

Each year, we evaluate indefinite lived intangible assets to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances that could affect the significant inputs used in determining fair value have occurred that indicate that it is more likely than not that the indefinite lived intangible asset is impaired. Deterioration in macroeconomic, industry and market conditions, cost factors or overall financial performance could cause us to determine a qualitative test is no longer appropriate. When quantitative assessments are performed, we primarily utilize income-based valuation approaches. Under the income-based valuation approach, we employ a relief from royalty method of valuation. This method requires significant assumptions, including assumed royalty rate, future revenues and cost of capital. Assumptions related to operating performance, such as future revenues, could be affected by loss of a customer contract; a decline in U.S. Government funding; or a decline in demand based on changing economic or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control.

Adverse changes in these assumptions utilized within our indefinite lived intangible asset impairment test could cause a reduction or elimination of excess fair value over carrying value, resulting in potential recognition of impairment.

We completed our annual review of our indefinite lived intangible assets during the year ended December 31, 2013, which indicated that we had no impairment. The fair value of our indefinite lived intangible assets was substantially in excess of carrying value.

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 10-K. There have been no material changes to our policies during the nine months ended September 30, 2014, except as disclosed above. Additionally, see Note 1 to our unaudited condensed consolidated financial statements included in this report for information on new and recently adopted accounting standards.

Accounting for Contracts

As of September 30, 2014, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. A principal risk on fixed-priced contracts is that revenue from the customer is insufficient to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects or provide performance guarantees. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows. In the nine months ended September 30, 2014 and 2013, we recognized net changes in estimates related to long-term contracts accounted for on the percentage-of-completion basis, which increased operating income by approximately $42.3 million and $11.9 million, respectively. Included in the nine months ended September 30, 2014 and 2013 were contract losses totaling $11.6 million and $30.2 million, respectively, for additional estimated costs to complete our Power Generation segment’s Berlin Station project. This project has reached substantial completion.

 

32


Table of Contents

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 VS. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

Selected financial highlights are presented in the table below:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     $ Change     2014     2013     $ Change  
     (In thousands)  

REVENUES:

            

Power Generation

   $ 402,016      $ 426,960      $ (24,944   $ 1,041,473      $ 1,359,614      $ (318,141

Nuclear Operations

     297,489        282,120        15,369        877,141        874,245        2,896   

Technical Services

     20,236        25,242        (5,006     70,706        77,903        (7,197

Nuclear Energy

     21,529        52,470        (30,941     114,236        179,171        (64,935

mPower

     —          343        (343     278        980        (702

Adjustments and Eliminations

     (3,368     (12,301     8,933        (17,909     (25,520     7,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 737,902      $ 774,834      $ (36,932   $ 2,085,925      $ 2,466,393      $ (380,468
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME:

            

Power Generation

   $ 35,260      $ 38,348      $ (3,088   $ 61,017      $ 102,213      $ (41,196

Nuclear Operations

     61,893        63,819        (1,926     180,103        184,280        (4,177

Technical Services

     4,951        18,398        (13,447     34,818        47,812        (12,994

Nuclear Energy

     (6,698     21        (6,719     (4,627     10,201        (14,828

mPower

     (5,140     (25,576     20,436        (63,782     (53,627     (10,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 90,266      $ 95,010      $ (4,744   $ 207,529      $ 290,879      $ (83,350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unallocated Corporate

     (5,352     (8,040     2,688        (13,729     (24,335     10,606   

Special Charges for Restructuring Activities

     (8,675     (4,849     (3,826     (28,803     (25,504     (3,299

Mark to Market Adjustment

     (11,079     —          (11,079     (11,079     —          (11,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 65,160      $ 82,121      $ (16,961   $ 153,918      $ 241,040      $ (87,122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Results of Operations

Three Months Ended September 30, 2014 vs. 2013

Consolidated revenues decreased 4.8%, or $36.9 million, to $737.9 million in the three months ended September 30, 2014 compared to $774.8 million for the corresponding period in 2013 due primarily to decreases in revenues from our Power Generation and Nuclear Energy segments totaling $24.9 million and $30.9 million, respectively. These decreases were partially offset by increased revenues in our Nuclear Operations segment totaling $15.4 million.

Consolidated operating income decreased $17.0 million to $65.2 million in the three months ended September 30, 2014 from $82.1 million for the corresponding period in 2013. Operating income for the three months ended September 30, 2014 and 2013 includes special charges for restructuring activities totaling $8.7 million and $4.8 million, respectively. Excluding special charges for restructuring activities and an $11.1 million mark to market adjustment related to the interim remeasurement of certain Canadian pension plans, operating income decreased $2.1 million for the three months ended September 30, 2014 compared to 2013. Operating income in our Power Generation, Nuclear Operations, Technical Services and Nuclear Energy segments declined $3.1 million, $1.9 million, $13.4 million and $6.7 million, respectively. These decreases were partially offset by increased operating income in our mPower segment totaling $20.4 million and a $2.7 million decline in unallocated corporate expenses for the 2014 period as compared to 2013.

Nine Months Ended September 30, 2014 vs. 2013

Consolidated revenues decreased 15.4%, or $380.5 million, to $2,085.9 million in the nine months ended September 30, 2014 compared to $2,466.4 million for the corresponding period in 2013 due primarily to decreases in revenues from our Power Generation and Nuclear Energy segments totaling $318.1 million and $64.9 million, respectively.

 

33


Table of Contents

Consolidated operating income decreased $87.1 million to $153.9 million in the nine months ended September 30, 2014 from $241.0 million for the corresponding period in 2013. Operating income for the nine months ended September 30, 2014 and 2013 includes special charges for restructuring activities totaling $28.8 million and $25.5 million, respectively. Excluding special charges for restructuring activities and an $11.1 million mark to market adjustment related to the interim remeasurement of certain Canadian pension plans, operating income decreased $72.7 million for the nine months ended September 30, 2014 compared to 2013. Operating income in our Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower segments declined $41.2 million, $4.2 million, $13.0 million, $14.8 million and $10.2 million, respectively. These decreases were partially offset by a $10.6 million decline in unallocated corporate expenses for the 2014 period as compared to 2013.

Power Generation

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ 402,016      $ 426,960      $ (24,944   $ 1,041,473      $ 1,359,614      $ (318,141

Operating Income

     35,260        38,348        (3,088     61,017        102,213        (41,196

% of Revenues

     8.8     9.0       5.9     7.5  

Three Months Ended September 30, 2014 vs. 2013

Revenues decreased 5.8%, or $24.9 million, to $402.0 million in the three months ended September 30, 2014, compared to $427.0 million in 2013. The decrease was primarily attributable to a $45.2 million decline in our new build steam generation systems business revenues, principally driven by the timing and level of activities on utility boiler and renewable energy projects. In addition, our new build environmental equipment business revenues decreased $22.8 million due to lower levels of engineering, procurement and construction activities as projects related to the previously enacted environmental rules and regulations near completion and uncertainties continue regarding the ultimate outcome of environmental regulations. Revenues from our aftermarket services business experienced a modest decrease of $9.9 million due to fewer service projects. The MEGTEC acquisition, which was completed on June 20, 2014 contributed $48.9 million of revenues for the three months ended September 30, 2014.

Operating income decreased $3.1 million to $35.3 million in the three months ended September 30, 2014 compared to $38.3 million in 2013, primarily due to the lower revenues discussed above. The MEGTEC acquisition contributed $2.7 million of operating income for the three months ended September 30, 2014, which includes $3.4 million of expense related to amortization of intangible assets. The decrease in income was partially offset by a $2.0 million reduction in selling, general and administrative expenses associated with cost savings initiatives.

Nine Months Ended September 30, 2014 vs. 2013

Revenues decreased 23.4%, or $318.1 million, to $1,041.5 million in the nine months ended September 30, 2014, compared to $1,359.6 million in 2013. The decrease was primarily attributable to a $179.1 million decline in revenues from our new build environmental equipment business revenues, principally driven by lower levels of engineering, procurement and construction activities as projects related to the previously enacted environmental rules and regulations near completion and uncertainties continue regarding the ultimate outcome of environmental regulations. We also experienced a $98.7 million decrease in revenues from our new build steam generation systems business due to a lower level of activity on our Berlin Station project and other renewable energy projects. In addition, we experienced a decrease in revenues of $100.5 million in our aftermarket services business related to fewer service projects, primarily due to a large boiler retrofit and construction project that was completed last year. The MEGTEC acquisition, which was completed on June 20, 2014, contributed $52.5 million of revenues for the nine months ended September 30, 2014.

Operating income decreased $41.2 million to $61.0 million in the nine months ended September 30, 2014 compared to $102.2 million in 2013, primarily due to the lower revenues discussed above being partially offset by a lower loss provision recorded on the Berlin Station project as compared to the prior period. The MEGTEC acquisition contributed $3.3 million of operating income for the nine months ended September 30, 2014, which includes $3.4 million of expense related to amortization of intangible assets. In addition, equity income from our joint ventures decreased by $4.9 million primarily due to market pressures in China and start up activities in India. These decreases were partially offset by an $8.0 million reduction in selling, general and administrative expenses associated with cost savings initiatives and a $3.3 million reduction in research and development expenditures.

 

34


Table of Contents

Nuclear Operations

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ 297,489      $ 282,120      $ 15,369      $ 877,141      $ 874,245      $ 2,896   

Operating Income

     61,893        63,819        (1,926     180,103        184,280        (4,177

% of Revenues

     20.8     22.6       20.5     21.1  

Three Months Ended September 30, 2014 vs. 2013

Revenues increased by 5.4%, or $15.4 million, to $297.5 million in the three months ended September 30, 2014 compared to $282.1 million in the corresponding period of 2013, primarily attributable to increased activity in the manufacturing of nuclear components for U.S. Government programs totaling $26.2 million. The increase was partially offset by lower revenue in our naval nuclear fuel and downblending business totaling $10.8 million attributable to lower decommissioning and downblending activities.

Operating income decreased $1.9 million to $61.9 million in the three months ended September 30, 2014 compared to $63.8 million in the corresponding period of 2013, primarily due to lower margins associated with the manufacturing of nuclear components for U.S. Government programs.

Nine Months Ended September 30, 2014 vs. 2013

Revenues increased by 0.3%, or $2.9 million, to $877.1 million in the nine months ended September 30, 2014 compared to $874.2 million in the corresponding period of 2013, primarily attributable to increased activity in the manufacturing of nuclear components for U.S. Government programs totaling $13.3 million. The revenue increase related to the manufacturing of nuclear components was due to higher volume, partially offset by lower revenue related to the timing of satisfaction of obligations under materials purchase contracts as compared to the prior year period. The overall segment increase was partially offset by lower revenue in our naval nuclear fuel and downblending business totaling $10.4 million attributable to lower decommissioning and downblending activities.

Operating income decreased $4.2 million to $180.1 million in the nine months ended September 30, 2014 compared to $184.3 million in the corresponding period of 2013, primarily due to lower margins associated with the manufacturing of nuclear components for U.S. Government programs.

Technical Services

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014      2013      $ Change     2014      2013      $ Change  

Revenues

   $ 20,236       $ 25,242       $ (5,006   $ 70,706       $ 77,903       $ (7,197

Operating Income

     4,951         18,398         (13,447     34,818         47,812         (12,994

Three Months Ended September 30, 2014 vs. 2013

Revenues decreased 19.8%, or $5.0 million, to $20.2 million in the three months ended September 30, 2014 compared to $25.2 million for the corresponding period of 2013, primarily attributable to a decrease in specialty manufacturing associated with the termination of our work scope for the American Centrifuge Program.

Operating income decreased $13.4 million to $5.0 million in the nine months ended September 30, 2014 compared to $18.4 million in the corresponding period of 2013. This decrease is primarily attributable to the loss of the Pantex and Y-12 contracts effective June 30, 2014. In addition, income associated with specialty manufacturing associated with the American Centrifuge Program decreased $1.2 million.

Nine Months Ended September 30, 2014 vs. 2013

Revenues decreased 9.2%, or $7.2 million, to $70.7 million in the nine months ended September 30, 2014 compared to $77.9 million for the corresponding period of 2013, primarily attributable to a decrease in specialty manufacturing associated with the termination of our work scope for the American Centrifuge Program.

 

35


Table of Contents

Operating income decreased $13.0 million to $34.8 million in the nine months ended September 30, 2014 compared to $47.8 million in the corresponding period of 2013. This decrease is primarily attributable to the loss of the Pantex and Y-12 contracts effective June 30, 2014. In addition, income from specialty manufacturing associated with the American Centrifuge Program decreased $2.7 million and selling, general and administrative expenses were $2.8 million higher compared to the corresponding period of 2013 primarily due to timing of new proposals.

Nuclear Energy

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013      $ Change     2014     2013     $ Change  

Revenues

   $ 21,529      $ 52,470       $ (30,941   $ 114,236      $ 179,171      $ (64,935

Operating Income

     (6,698     21         (6,719     (4,627     10,201        (14,828

% of Revenues

     (31.1 )%      —             (4.1 )%      5.7  

Three Months Ended September 30, 2014 vs. 2013

Revenues decreased 59.0%, or $30.9 million, to $21.5 million in the three months ended September 30, 2014 compared to $52.5 million in the corresponding period of 2013. This decrease was primarily attributable to the exit of our nuclear projects business, which had $19.7 million of revenues in the prior year period. The remainder of the decrease is primarily attributable to the completion of two replacement steam generator contracts that were ongoing in the prior year period.

Operating income decreased $6.7 million to a loss of $6.7 million in the three months ended September 30, 2014 compared to $0.0 million in the corresponding period of 2013, primarily attributable to the decrease in nuclear equipment revenues noted above related to the completion of the two replacement steam generator contracts. In addition, during the three months ended September 30, 2013, we recognized $4.0 million of warranty improvements associated with favorable warranty experience.

Nine Months Ended September 30, 2014 vs. 2013

Revenues decreased 36.2%, or $64.9 million, to $114.2 million in the nine months ended September 30, 2014 compared to $179.2 million in the corresponding period of 2013. This decrease is largely attributable to a decrease in revenues from our nuclear equipment business due to the completion of two replacement steam generator contracts that were ongoing in the prior year period. In addition, we also experienced a $22.0 million decrease in our nuclear services business due to the completion of certain maintenance and service projects that were ongoing in the prior period. The exit of our nuclear projects business also contributed to a $20.8 million decrease in revenues compared to 2013.

Operating income decreased $14.8 million to a loss of $4.6 million in the nine months ended September 30, 2014 compared to income of $10.2 million in the corresponding period of 2013, primarily attributable to the decrease in revenues noted above. This decrease was partially offset by $4.1 million of reduced selling, general and administrative expenses associated with cost savings from GCI initiatives. In addition, during the nine months ended September 30, 2013, we recognized $6.1 million of warranty improvements associated with favorable warranty experience.

mPower

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ —        $ 343      $ (343   $ 278      $ 980      $ (702

Operating Income

     (5,140     (25,576     20,436        (63,782     (53,627     (10,155

Three Months Ended September 30, 2014 vs. 2013

Operating income increased $20.4 million to a loss of $5.1 million in the three months ended September 30, 2014 compared to a loss of $25.6 million in the corresponding period of 2013, due to the slowing of the pace of development related to our previously announced plans to restructure the mPower program. Research and development activities related to the development of the B&W mPower™ reactor decreased by $25.9 million with a related decrease in the recognition of the cost-sharing award from the DOE under the Cooperative Agreement totaling $10.9 million. Selling, general and administrative expenses also decreased by $5.3 million.

 

36


Table of Contents

Nine Months Ended September 30, 2014 vs. 2013

Operating income decreased $10.2 million to a loss of $63.8 million in the nine months ended September 30, 2014 compared to a loss of $53.6 million in the corresponding period of 2013, primarily due to a decrease in the recognition of the cost-sharing award from the DOE under the Cooperative Agreement totaling $28.8 million. The nine months ended September 30, 2013 included the recognition of $9.7 million related to cost reimbursement for the 2012 pre-award period. Research and development activities related to the development of the B&W mPower™ reactor and selling, general and administrative expenses decreased by $13.6 million and $4.8 million, respectively, due to the slowing of the pace of development related to our announced plans to restructure the mPower program.

Unallocated Corporate

Unallocated corporate expenses decreased $2.7 million to $5.4 million for the three months ended September 30, 2014, as compared to $8.0 million for the corresponding period in 2013. Additionally, unallocated corporate expenses decreased $10.6 million to $13.7 million for the nine months ended September 30, 2014, as compared to $24.3 million for the corresponding period in 2013. The decline in both the three and nine month periods is mainly related to the timing of healthcare cost allocations and favorable healthcare cost trends.

Special Charges for Restructuring Activities

Operating income for the three months ended September 30, 2014 includes special charges for restructuring activities totaling $0.9 million of GCI charges related to facility consolidation; $0.3 million in consulting and administrative costs related to the restructuring of our mPower program; and $7.5 million in employee termination benefits, facility consolidation and consulting and administrative costs related to margin improvement initiatives in our Power Generation and Nuclear Energy segments. During the three months ended September 30, 2013, we recorded GCI charges of $4.8 million related to employee termination benefits, facility consolidation and consulting and administrative costs.

Operating income for the nine months ended September 30, 2014 includes special charges for restructuring activities totaling $3.3 million of GCI charges related to facility consolidation and employee termination benefits; $8.2 million in employee termination benefits, facility consolidation and consulting and administrative costs related to the restructuring of our mPower program; $16.9 million in employee termination benefits, facility consolidation and consulting and administrative costs related to margin improvement initiatives in our Power Generation and Nuclear Energy segments; and $0.4 million in employee termination benefits for the restructuring of our Technical Services segment. During the nine months ended September 30, 2013, we recorded GCI charges of $25.5 million related to employee termination benefits, facility consolidation and consulting and administrative costs.

Provision for Income Taxes

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Income from Continuing Operations before Provision for Income Taxes

   $ 81,074      $ 81,437      $ (363   $ 170,523      $ 241,815      $ (71,292

Income Tax Provision

     20,671        24,416        (3,745     45,474        70,217        (24,743

Effective Tax Rate

     25.5     30.0       26.7     29.0  

Our effective tax rate for the three months ended September 30, 2014 was approximately 25.5% as compared to 30.0% for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was lower than our statutory rate and the effective tax rate for the three months ended September 30, 2013, primarily due to the impact of an $18.6 million gain from the exchange of our USEC investment for which the related tax provision was offset against the reversal of a previously established valuation allowance related to the prior impairments of the USEC investment.

Our effective tax rate for the nine months ended September 30, 2014 was approximately 26.7% as compared to 29.0% for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September

 

37


Table of Contents

30, 2014 was lower than our statutory rate primarily due to the receipt of a favorable ruling from the Internal Revenue Service that allows us to amend prior year U.S. income tax returns to exclude distributions of certain of our foreign joint ventures from domestic taxable income. In addition, the effective tax rate for the nine months ended September 30, 2014 was lower due to the $18.6 million gain from the exchange of our USEC investment for which the related tax provision was offset by the reversal of a previously established valuation allowance related to the prior impairments of the USEC investment. Our effective tax rate for the nine months ended September 30, 2013 reflected the impact of certain tax benefits related to the retroactive provisions of the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013. These 2013 tax benefits relate primarily to research and development tax credits.

Backlog

Backlog is not a measure recognized by generally accepted accounting principles. It is possible that our methodology for determining backlog may not be comparable to methods used by other companies. We generally include expected revenue in our backlog when we receive written confirmation from our customers. We are subject to the budgetary and appropriation cycle of the U.S. Government as it relates to our Nuclear Operations and Technical Services segments. Backlog may not be indicative of future operating results and projects in our backlog may be cancelled, modified or otherwise altered by customers. We do not include orders of our unconsolidated joint ventures in backlog. These unconsolidated joint ventures are primarily included in our Power Generation and Technical Services segments.

 

     September 30,
2014
     December 31,
2013
 
     (Unaudited)  
     (In millions)  

Power Generation

   $ 2,133       $ 2,072   

Nuclear Operations

     2,376         2,369   

Technical Services

     4         5   

Nuclear Energy

     273         142   

mPower

     —           2   
  

 

 

    

 

 

 

Total Backlog

   $ 4,786       $ 4,590   
  

 

 

    

 

 

 

Of the September 30, 2014 backlog, we expect to recognize revenues as follows:

 

     2014      2015      Thereafter      Total  
     (Unaudited)  
     (In approximate millions)  

Power Generation

   $ 351       $ 777       $ 1,005       $ 2,133   

Nuclear Operations

     277         880         1,219         2,376   

Technical Services

     4         —           —           4   

Nuclear Energy

     35         59         179         273   

mPower

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Backlog

   $ 667       $ 1,716       $ 2,403       $ 4,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2014, Power Generation backlog with the U.S. Government was $32.3 million, all of which was funded.

At September 30, 2014, Nuclear Operations backlog with the U.S. Government was $2.2 billion, of which $219.1 million had not yet been funded.

At September 30, 2014, Technical Services backlog with the U.S. Government was $4.4 million, all of which was funded.

At September 30, 2014, Nuclear Energy and mPower had no backlog with the U.S. Government.

 

38


Table of Contents

Liquidity and Capital Resources

Credit Facility

On June 24, 2014, B&W entered into a Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with a syndicate of lenders and letter of credit issuers, and Bank of America, N.A., as administrative agent, which amends and restates our previous Credit Agreement dated June 8, 2012. The New Credit Agreement provides for revolving credit borrowings and issuances of letters of credit in an aggregate amount of up to $1.0 billion and a term loan facility of up to $300 million, $150 million of which was drawn on the closing date of the New Credit Agreement. The remaining $150 million commitment for the term loan remains available under a delayed draw feature through December 31, 2014. The New Credit Agreement is scheduled to mature on June 24, 2019. The proceeds of the New Credit Agreement are available for the issuance of letters of credit, working capital needs and other general corporate purposes. The New Credit Agreement includes provisions that allow for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder, subject to an aggregate maximum of $400 million for all incremental term loan, revolving credit borrowings and letter of credit commitments.

The New Credit Agreement is guaranteed by substantially all of B&W’s wholly owned domestic subsidiaries. Obligations under the New Credit Agreement are secured by first-priority liens on certain assets owned by B&W and the guarantors (other than our subsidiaries comprising our Nuclear Operations and Technical Services segments). If the corporate family rating of B&W and its subsidiaries from Moody’s is Baa3 or better (with a stable outlook or better), the corporate rating of B&W and its subsidiaries from S&P is BBB- or better (with a stable outlook or better), and other conditions are met, the liens securing obligations under the New Credit Agreement will be released, subject to reinstatement upon the terms set forth in the New Credit Agreement. B&W’s current corporate family rating from Moody’s is Ba1 and its corporate rating from S&P is BB+.

The New Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. Beginning with the quarter following that in which the term loan commitment ends, we are also required to make quarterly amortization payments on the term loan portion of the New Credit Agreement in an amount equal to 1.25% of the aggregate principal amount of the term loan facility that is utilized. We may prepay all loans under the New Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. We are also required to make certain prepayments on any outstanding term loans under the New Credit Agreement after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and our right to reinvest such proceeds in certain circumstances, all as more particularly set forth in the New Credit Agreement.

The New Credit Agreement contains financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt and mergers. At September 30, 2014, we were in compliance with all of the covenants set forth in the New Credit Agreement.

Loans outstanding under the New Credit Agreement bear interest at our option at either the Eurocurrency rate plus a margin ranging from 1.25% to 2.00% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the one month Eurocurrency rate plus 1.00%, or the administrative agent’s prime rate) plus a margin ranging from 0.25% to 1.00% per year. The applicable margin for loans varies depending on the credit ratings of the New Credit Agreement. Under the New Credit Agreement, we are charged a commitment fee on the unused portions of the New Credit Agreement, and that fee varies between 0.200% and 0.350% per year depending on the credit ratings of the New Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.250% and 2.000% per year with respect to the amount of each financial letter of credit issued under the New Credit Agreement and a letter of credit fee of between 0.725% and 1.125% per year with respect to the amount of each performance letter of credit issued under the New Credit Agreement, in each case depending on the credit ratings of the New Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the New Credit Agreement. In connection with entering into the New Credit Agreement, we paid upfront fees to the lenders thereunder, and arrangement and other fees to the arrangers and agents of the New Credit Agreement. At September 30, 2014, borrowings outstanding totaled $150.0 million and $154.4 million under our term loan and revolving line of credit, respectively, and letters of credit issued under the New Credit Agreement totaled $170.2 million, resulting in $825.4 million available for borrowings or to meet letter of credit requirements.

 

39


Table of Contents

Based on the current credit ratings of the New Credit Agreement, the applicable margin for Eurocurrency rate loans is 1.375%, the applicable margin for base rate loans is 0.375%, the letter of credit fee for financial letters of credit is 1.375%, the letter of credit fee for performance letters of credit is 0.80%, and the commitment fee for unused portions of the New Credit Agreement is 0.225%. The New Credit Agreement does not have a floor for the base rate or the Eurocurrency rate.

The New Credit Agreement generally includes customary events of default for a secured credit facility. If any default occurs under the New Credit Agreement, or if we are unable to make any of the representations and warranties in the New Credit Agreement, we will be unable to borrow funds or have letters of credit issued under the New Credit Agreement.

Other Arrangements

Certain subsidiaries within our Power Generation segment have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of September 30, 2014 was $117.8 million.

We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety’s discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2014, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $400.8 million.

Long-term Benefit Obligations

Our unfunded pension and postretirement benefit obligations totaled $399.8 million at September 30, 2014. These long-term liabilities are expected to require use of Company resources to satisfy our future funding obligations. For the nine months ended September 30, 2014, we made contributions to our pension and postretirement benefit plans totaling $63.2 million. We expect to make contributions to these plans totaling $4.3 million for the remainder of 2014.

Other

In aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by $143.7 million to $266.3 million at September 30, 2014 from $410.0 million at December 31, 2013 primarily due to the items discussed below.

Our working capital increased by approximately $150.5 million to $660.7 million at September 30, 2014 from $510.2 million at December 31, 2013, attributable primarily to an increase in net contracts in progress and advance billings on contracts due primarily to lower net advance billings associated with the decline in contract activity in our Power Generation segment. We also experienced increased working capital associated with accounts payable movement caused by the adverse timing of payments of contract costs in relation to the collection of billings on certain contracts. In addition, a larger portion of our pension liability is reported as a long-term obligation this period.

Our net cash used in operations was $85.2 million in the nine months ended September 30, 2014, compared to cash used in operations of $6.0 million for the nine months ended September 30, 2013. This increase in cash used was primarily attributable to a reduction in accounts payable as discussed above.

Our net cash used in investing activities increased by $183.1 million to $175.2 million in the nine months ended September 30, 2014 from cash provided by investing activities of $7.9 million in the nine months ended September 30, 2013. This increase in net cash used in investing activities was primarily attributable to the acquisition of MEGTEC.

 

40


Table of Contents

Our net cash provided by financing activities was $119.1 million in the nine months ended September 30, 2014, compared to cash used in financing activities of $163.3 million for the nine months ended September 30, 2013. This increase in net cash provided by financing activities was primarily attributable to an increase in borrowings on our credit facility, primarily to fund the acquisition of MEGTEC, common share repurchase activity and working capital needs.

At September 30, 2014, we had restricted cash and cash equivalents totaling $45.8 million, $5.6 million of which was held in restricted foreign accounts, $2.6 million of which was held for future decommissioning of facilities (which we include in other assets on our condensed consolidated balance sheets) and $37.6 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).

At September 30, 2014, we had investments with a fair value of $23.5 million. Our investment portfolio consists primarily of investments in corporate bonds, equities and highly liquid money market instruments. Our investments are carried at fair value and are either classified as trading, with unrealized gains and losses reported in earnings, or as available-for-sale, with unrealized gains and losses, net of tax, reported as a component of other comprehensive income.

Foreign Operations

Approximately $174.6 million, or 88.7%, of our total unrestricted cash and cash equivalents at September 30, 2014 is related to foreign operations. In general, these resources are not available to fund our U.S. operations unless the funds are repatriated to the U.S., which would expose us to certain taxes we presently have not accrued in our results of operations. We presently have no plans to repatriate these funds to the U.S. as the liquidity generated by our U.S. operations is sufficient to meet the cash requirements of our U.S. operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposures to market risks have not changed materially from those disclosed in Item 7A included in Part II of our 2013 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2014 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure. There has been no change in our internal control over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

41


Table of Contents

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 5 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.

Item 1A. Risk Factors

In addition to the risk factor below and the other information in this report, the other factors presented in Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2013 are some of the factors that could materially affect our business, financial condition or future results.

The proposed spin-off of our power generation business is contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management and may not achieve the intended results, and difficulties in connection with the spin-off could have an adverse effect on us.

We plan to pursue a spin-off of our power generation business through a distribution to our stockholders of all of the shares of common stock of a subsidiary that would hold, directly or indirectly, the assets and liabilities of our power generation businesses. The spin-off will be contingent upon various conditions, including the approval of our Board of Directors, review by the Nuclear Regulatory Commission, the effectiveness of a Form 10 registration statement filed with the Securities and Exchange Commission and other conditions. For these and other reasons, the spin-off may not be completed. Additionally, execution of the proposed spin-off will likely require significant time and attention of our management, which could distract management from the operation of our business and the execution of our other strategic initiatives. Some of our employees may also be uncertain about their future roles within the separate companies pending the completion of the spin-off. Further, if the spin-off is completed, it may not achieve the intended results. Any such difficulties could have an adverse effect on our business, results of operations or financial condition.

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

In November 2012, we announced that our Board of Directors authorized a share repurchase program. The following table provides information on our purchases of equity securities during the quarter ended September 30, 2014. For the nine months ended September 30, 2014, we repurchased 4.7 million shares at a cost of $149.8 million. Any shares purchased that were not part of a publicly announced plan or program are related to repurchases of common stock pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.

 

42


Table of Contents

Period

   Total number
of shares
purchased
(1)
     Average
price

paid
per share
     Total number of
shares purchased as
part of publicly
announced plans or
programs
     Approximate dollar
value of shares that
may yet be
purchased under the
plans or programs
(in millions)
(2)
 

July 1, 2014 – July 31, 2014

     600,800       $ 32.76         600,800       $ 377.0   

August 1 2014 – August 31, 2014

     938,295       $ 29.45         938,200       $ 349.4   

September 1, 2014 – September 30, 2014

     92,579       $ 29.11         92,200       $ 346.6   
  

 

 

    

 

 

    

 

 

    

Total

     1,631,674       $ 30.65         1,631,200      
  

 

 

    

 

 

    

 

 

    

 

(1) Includes 95 and 379 shares repurchased during August and September, respectively, pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.
(2) On November 7, 2012, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million in the open market during a two-year period ending on November 5, 2014. On May 7, 2013, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million. On February 26, 2014, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million. The May 2013 and February 2014 authorizations are in addition to the initial $250 million share repurchase amount authorized in November 2012. On December 9, 2013, we completed the repurchase of shares using our initial $250 million authorization. We may repurchase shares in the open market using the additional repurchase amounts authorized in May 2013 and February 2014 during a two-year period that expires February 25, 2016.

Item 4. Mine Safety Disclosures

We own, manage and operate Ebensburg Power Company, an independent power company that produces alternative electrical energy. Through one of our subsidiaries, Revloc Reclamation Service, Inc., Ebensburg Power Company operates multiple coal refuse sites in Western Pennsylvania (collectively, the “Revloc Sites”). At the Revloc Sites, Ebensburg Power Company utilizes coal refuse from abandoned surface mine lands to produce energy. Beyond converting the coal refuse to energy, Ebensburg Power Company is also taking steps to reclaim the former surface mine lands to make the land and streams more attractive for wildlife and human uses.

The Revloc Sites are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and this Item is included in Exhibit 95 to this quarterly report on Form 10-Q.

 

43


Table of Contents

Item 6. Exhibits

Exhibit 2.1* - Master Separation Agreement dated as of July 2, 2010 between McDermott International, Inc. and The Babcock & Wilcox Company (incorporated by reference to Exhibit 2.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).

Exhibit 3.1* - Restated Certificate of Incorporation of The Babcock & Wilcox Company (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).

Exhibit 3.2* - Amended and Restated Bylaws of The Babcock & Wilcox Company effective September 9, 2013 (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated September 11, 2013 (File No. 1-34658)).

Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.

Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.

Exhibit 32.1 - Section 1350 certification of Chief Executive Officer.

Exhibit 32.2 - Section 1350 certification of Chief Financial Officer.

Exhibit 95 - Mine Safety Disclosure

101.INS - XBRL Instance Document

101.SCH - XBRL Taxonomy Extension Schema Document

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

 

 

* Incorporated by reference to the filing indicated.

 

44


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  THE BABCOCK & WILCOX COMPANY
 

/s/ Anthony S. Colatrella

By:   Anthony S. Colatrella
  Senior Vice President and Chief Financial Officer
  (Principal Financial Officer and Duly Authorized Representative)
 

/s/ David S. Black

By:   David S. Black
  Vice President and Chief Accounting Officer
  (Principal Accounting Officer and Duly Authorized Representative)

November 5, 2014

 

45


Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

   Description
2.1*    Master Separation Agreement, dated as of July 2, 2010, between McDermott International, Inc. and The Babcock & Wilcox Company (incorporated by reference to Exhibit 2.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).
3.1*    Restated Certificate of Incorporation of The Babcock & Wilcox Company (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).
3.2*    Amended and Restated Bylaws of The Babcock & Wilcox Company effective September 9, 2013 (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Current Report on Form 8-K dated September 11, 2013 (File No. 1-34658)).
31.1    Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
31.2    Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.
32.1    Section 1350 certification of Chief Executive Officer.
32.2    Section 1350 certification of Chief Financial Officer.
95    Mine Safety Disclosure
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Incorporated by reference to the filing indicated.