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 and the audited consolidated and combined 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, 2011 (our "2011 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 avail ourselves of the "safe harbor" protection for
forward-looking statements provided by federal securities law, including
Section 21E of the Securities Exchange Act of 1934.
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,"
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"believe," "expect," "anticipate," "plan," "goal" 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 to the extent it 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 capital, environmental or maintenance expenditures;
• our beliefs regarding the timing and effects on our businesses of certain
environmental 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 ability to obtain contract security capacity including surety bonds,
bank guarantees and letters of credit;
• our ability to maintain appropriate insurance and indemnities;
• the potential effects of judicial or other proceedings on our business and
businesses, financial condition, results of operations and cash flows; and
• the anticipated effects of actions of third parties such as competitors, or
federal, foreign, state or local regulatory authorities, or plaintiffs in
litigation.
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.
These forward-looking statements speak only as of the date of this report; we
disclaim any obligation to update these statements unless required by securities
law, and we caution you not to rely on them unduly. We have based these
forward-looking statements on our current expectations and assumptions about
future events. While our management considers these expectations and 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.
These risks, contingencies and uncertainties relate to, among other matters, the
following:
• general economic and business conditions and industry trends;
• general developments in the industries in which we are involved;
• decisions on spending by the U.S. Government and electric power generating
companies;
• the highly competitive nature of our businesses;
• 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, in accordance with the schedules
established by the applicable contracts with customers;
• the ability of our suppliers to deliver raw materials in sufficient
quantities and in a timely manner;
• volatility and uncertainty of the credit markets;
• our ability to comply with covenants in our credit agreements and other
debt instruments and availability, terms and deployment of capital;
• the impact of our unfunded pension liabilities on liquidity, and our
ability to fund such liabilities in the future, including our ability to
continue being reimbursed by the U.S. Government for a portion of our
pension funding obligations, which is contingent on maintaining our
government contracts;
• the continued availability of qualified personnel;
• the operating risks normally incident to our lines of business, including
the potential impact of liquidated damages;
• changes in, or our failure or inability to comply with, government
regulations;
• adverse outcomes from legal and regulatory proceedings;
• impact of potential regional, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the future;
• our ability to successfully manage research and development projects,
including our efforts to develop the small modular nuclear power plant
based on B&W mPowerTM technology;
• impact of potential regulatory and industry response affecting the timing
and cost of future nuclear development as a result of the damage caused by
the March 11, 2011 earthquakes and tsunami on certain of Japan's nuclear
facilities;
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• changes in, and liabilities relating to, existing or future environmental
regulatory matters;
• rapid technological changes;
• the realization of deferred tax assets;
• the consequences of significant changes in interest rates and currency
exchange rates;
• a determination by the IRS that the spin-off or certain transactions should
be treated as a taxable transaction;
• our ability to maintain our capital structure, including our access to
capital, credit ratings, debt and ability to raise additional financing;
• difficulties we may encounter in obtaining regulatory or other necessary
approvals of any strategic transactions;
• the risks associated with integrating businesses we acquire;
• our ability to realize adequate returns and related dividends on our
investments in unconsolidated affiliates;
• 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;
• social, political and economic situations in foreign countries where we do
business;
• the possibilities of war, other armed conflicts or terrorist attacks;
• the effects of asserted and unasserted claims;
• our ability to maintain surety bonds, letters of credit and financing;
• our ability to maintain builder's risk, liability, property and other
insurance in amounts and on terms we consider adequate and at rates that we
consider economical;
• our ability to successfully develop competitive new technologies and
products;
• the aggregated risks retained in our captive insurance subsidiary; and
• the impact of the loss of insurance rights as part of the Chapter 11
Bankruptcy settlement concluded in 2006 involving several of our
subsidiaries.
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 in Item 1A in our 2011 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 four segments: Power Generation, Nuclear Operations, Technical
Services and Nuclear Energy.
Business Segments
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. As we pursue these opportunities, we expect
they would be funded 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;
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• 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 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 planned acquisitions and partnering arrangements.
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.
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 U.S. Department of Energy ("DOE").
Nuclear Energy Segment
Our Nuclear Energy segment's overall activity depends mainly on the demand and
competitiveness of nuclear energy. This segment is actively developing the B&W
mPowerTM reactor and its activity is also a function of research and development
efforts for the B&W mPowerTM reactor and the potential revenues to be generated
from the B&W mPowerTM initiative. As part of this initiative, the Nuclear Energy
segment has applied for funding from the DOE under its Small Modular Reactor
Licensing Technical Support Program ("Funding Program"), which provides
financial assistance for small modular reactor designs demonstrating, among
other things, the ability to support a commercial operating date for a small
modular reactor plant by 2022. The Nuclear Energy segment plans to meet all of
the requirements of the Funding Program, including the requirement to deploy
this technology by 2022.
For a summary of the critical accounting policies and estimates that we use in
the preparation of our unaudited condensed consolidated and combined financial
statements, see Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2011 10-K. There have been no
material changes to these policies during the six months ended June 30, 2012.
Outlook Update
Government Operations
In August 2011, Congress enacted the Budget Control Act of 2011, which committed
the U.S. Government to significantly reducing the federal deficit over ten
years. The Budget Control Act will likely constrain discretionary spending by
the federal government for a number of years as it capped discretionary spending
through 2021. It also established a Joint Committee of Congress to identify an
additional $1.2 to $1.5 trillion in deficit reductions by November 23, 2011. The
Joint Committee was unable to meet this deadline, triggering a provision,
referred to as "sequestration", that calls for substantial automatic spending
cuts split between defense and non-defense programs scheduled to start in
January 2013 and continue over a nine-year period. Federal government spending
reductions, including through sequestration, could adversely impact U.S.
Government programs for which we provide products or services. There is
currently no official planning guidance regarding how sequestration would be
implemented, if it were to go into effect. As members of Congress and the
Administration continue to discuss various options to prevent or defer
sequestration, we cannot predict whether any such efforts will succeed.
Additionally, while we believe many of our programs are well aligned with
national defense and other strategic priorities, the outcome of efforts underway
regarding sequestration is uncertain and it is possible that spending cuts may
be applied to U.S. Government programs
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across the board, regardless of how programs align with those priorities. There
are many variables in how the Budget Control Act could be implemented that will
determine its specific impact; however, reductions in federal government
spending and sequestration, as currently provided for under the Budget Control
Act, could have a material adverse impact on the operating results and cash
flows of our Nuclear Operations and Technical Services segments.
In late July 2012, the Y-12 National Security Complex in Oak Ridge, Tennessee,
which we manage and operate for the DOE through one of our joint ventures,
experienced a security breach. Nuclear operations at the site were temporarily
ceased in early August 2012. The Y-12 security force has been managed by another
contractor. Given the early stages of the U.S. Government's investigation, any
consequences for us that result from this event are uncertain.
Power Generation
The EPA issued proposed final environmental regulations concerning Mercury and
Air Toxics Standards ("MATS") and rules concerning implementation of the Cross
State Air Pollution Rule ("CSAPR") in 2011. On December 30, 2011 the Federal
Appeals Court for the DC Circuit stayed the CSAPR rules and reinstated EPA
regulations from 2005. Oral arguments were held in April of 2012 and a decision
is pending.
Uncertainty concerning final rules and regulations could impact our Power
Generation segment. For example, instead of adding environmental equipment, some
of our customers may decide to close down their least efficient coal-fired
boilers. Future decisions to retire boilers would impact our business in a
variety of ways, including the servicing and retrofitting of operating power
plants. The need to replace retired generating capacity with cleaner
technologies would also create business opportunities for us. To generate energy
while minimizing the emission of greenhouse gasses, we are actively researching
and developing a range of products, including:
• non-carbon technologies, such as nuclear power plants and solar receivers
for concentrating solar power plants;
• low-carbon technologies that enable clean use of fossil fuels, such as
oxy-fuel combustion and regenerable solvent absorption technologies to
scrub carbon dioxide from exhaust gases; and
• carbon-neutral technologies, such as biomass-fueled boilers and gasifiers,
which use a renewable resource where the growing biomass re-absorbs the
carbon dioxide emitted during energy production.
Accounting for Contracts
As of June 30, 2012, 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 and 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
six months ended June 30, 2012 and 2011, we recognized changes in estimate
related to long-term contracts accounted for on the percentage-of-completion
basis which increased (decreased) operating income by approximately $47.6
million and ($10.4) million, respectively. In addition, in the six months ended
June 30, 2012, we recognized revenues totaling $18.4 million attributable to the
settlement of a contract claim related to a condenser replacement contract in
our Nuclear Energy segment. The six months ended June 30, 2011 amount includes
approximately $58.7 million of cost over-runs ($47.6 million in our Nuclear
Energy segment and $11.1 in our Nuclear Operations segment) to complete certain
projects attributable to changes in estimate due to productivity, scope and
scheduling issues. The project in our Nuclear Energy segment is complete, and
the projects in our Nuclear Operations segment are substantially complete.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2012 VS. THREE MONTHS ENDED
JUNE 30, 2011
The Babcock & Wilcox Company (Consolidated)
Revenues increased approximately 13.3%, or $100.2 million, to $852.6 million in
the three months ended June 30, 2012 compared to $752.4 million for the
corresponding period in 2011 primarily due to increases in revenues from our
Power Generation segment totaling $108.4 million. We also experienced decreases
in revenues in our Nuclear Energy, Nuclear Operations and Technical Services
segments totaling $26.5 million, $7.2 million and $2.4 million, respectively.
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Operating income increased $26.1 million to $89.4 million in the three months
ended June 30, 2012 from $63.3 million for the corresponding period in 2011, due
primarily to increases in our Nuclear Energy and Power Generation segments
totaling $20.4 million and $18.4 million, respectively. We also experienced an
increase in our Technical Services segment totaling $3.9 million. These
increases were partially offset by a decrease in our Nuclear Operations segment
totaling $10.8 million and increased Unallocated Corporate expenses of $5.8
million.
Power Generation
Revenues increased 27.9%, or $108.4 million, to $497.0 million in the three
months ended June 30, 2012, compared to $388.6 million in the corresponding
period of 2011, primarily attributable to an increase in revenues of $54.9
million from our new-build environmental equipment business principally driven
by the beginning of projects as a result of new environmental rules and
regulations. In addition, revenues in our new-build steam generation systems
business increased $44.1 million primarily due to increased activities on
waste-to-energy and biomass boiler projects. We also experienced revenue
increases of $9.8 million in our aftermarket services business driven by
increases in environmental aftermarket equipment upgrades and retrofits,
partially offset by lower construction activities on boiler retrofit projects.
Operating income increased $18.4 million to $46.5 million in the three months
ended June 30, 2012 compared to $28.1 million in the corresponding period of
2011, mainly due to the increases in revenues discussed above. We also
experienced favorable margin impact from project close-outs and improvements on
previous cycle new-build environmental equipment projects and new-build steam
generation utility projects that was offset by more competitive profit margins
on early market new-build environmental equipment projects. Warranty expense
increased $2.2 million compared to 2011 due to the increases in revenues
discussed above. Equity in income of investees decreased $2.9 million, primarily
attributable to lower production and project activities at our joint venture in
China.
Nuclear Operations
Revenues decreased 2.6%, or $7.2 million, to $265.4 million in the three months
ended June 30, 2012 compared to $272.6 million in the corresponding period of
2011, primarily attributable to lower volumes in our naval nuclear fuel and
downblending activities totaling $9.9 million. These decreases were partially
offset by increased revenue from the manufacturing of nuclear components for
U.S. Government programs totaling $2.7 million.
Operating income decreased $10.8 million to $48.5 million in the three months
ended June 30, 2012 compared to $59.3 million in the corresponding period in
2011. Included in operating income for the three months ended June 30, 2011 is a
$10.9 million gain resulting from a favorable settlement with the previous owner
of Nuclear Fuel Services, Inc. ("NFS").
Technical Services
Revenues decreased 7.8%, or $2.4 million, to $28.3 million in the three months
ended June 30, 2012 compared to $30.7 million for the corresponding period of
2011, primarily attributable to a decrease in our specialty manufacturing work
scope associated with the American Centrifuge Program.
Operating income increased $3.9 million to $18.4 million in the three months
ended June 30, 2012 compared to $14.5 million in the corresponding period of
2011. This increase is primarily due to additional equity in income of investees
totaling $1.3 million principally from new government contract awards, a $1.2
million gain from the sale of our interest in a joint venture associated with
the management and operations of the Strategic Petroleum Reserve, $0.6 million
of increased margins on our task order support business and a decrease in
research and development expenses of $0.5 million.
Nuclear Energy
Revenues decreased 28.2%, or $26.5 million, to $67.4 million in the three months
ended June 30, 2012 compared to $93.9 million in the corresponding period of
2011, primarily attributable to decreased activity in our nuclear services
business due to the timing and scope of customer outage projects, and reduced
project scope completion on a replacement steam generator project in our nuclear
equipment business. For the three months ended June 30, 2012, revenues in our
nuclear projects business included $18.4 million as a result of the May 2012
claims
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settlement agreement reached with Energy Northwest related to a condenser
replacement project at Columbia Generating Station in 2011.
Operating income increased $20.4 million to a loss of $12.9 million in the three
months ended June 30, 2012 compared to a loss of $33.3 million in the
corresponding period of 2011, due to $26.0 million of project costs to complete
the condenser replacement project at Columbia Generating Station recognized
during the three months ended June 30, 2011 and $18.1 million (net of related
expenses) recognized in the three months ended June 30, 2012 associated with the
May 2012 settlement agreement discussed above. These increases were partially
offset by $7.5 million of reduced operating income associated with the revenue
decreases discussed above and $11.7 million of increased research and
development costs related to the continued development of the B&W mPower™
reactor. In addition, we experienced increases in selling, general and
administrative expenses totaling $3.8 million related to the continued expansion
of our presence in the commercial nuclear energy industry.
The increase in research and development costs discussed above includes
recognition of $5.1 million of research and development costs related to the
consolidation of Generation mPower LLC ("GmP"), our majority-owned subsidiary
overseeing the program to develop the small modular nuclear power plant based on
B&W mPower™ technology. These costs represent non-cash, non-deductible expenses
related to the value of the in-kind research and development services
contributed to the program by GmP's minority partner.
For any period, the impact to net income attributable to The Babcock & Wilcox
Company of these in-kind services will depend on the timing of services provided
by our partner. For the three months ended June 30, 2012, the value of the
in-kind services exceeded the amount of research and development costs allocated
to the minority partner. As a result, net income attributable to The Babcock &
Wilcox Company, after taking into account the non-cash non-controlling interest
recognition totaling $3.0 million, was negatively impacted by $2.1 million. We
expect to recognize a positive impact to net income attributable to The
Babcock & Wilcox Company in future periods when the value of the in-kind
services received is less than the minority partner's proportional share of
development costs for the period.
This accounting treatment has also resulted in $11.0 million of non-controlling
interest accumulated on our consolidated balance sheet at June 30, 2012. We have
not incurred a present liability for the in-kind services received as part of
the development program and our minority partner does not currently have rights
to share in the net assets of B&W or GmP.
Corporate
Unallocated corporate expenses increased $5.8 million to $11.1 million for the
three months ended June 30, 2012, as compared to $5.3 million for the
corresponding period in 2011, mainly due to increased information technology
expenses attributable to timing, and higher incentive compensation expenses in
2012 compared to 2011.
Other Income Statement Items
Other income totaling $3.7 million for the three months ended June 30, 2012 was
relatively flat compared to $3.4 million for the corresponding period in 2011.
Provision for Income Taxes
For the three months ended June 30, 2012, our provision for income taxes
increased $11.6 million to $31.9 million, while income before provision for
income taxes increased $26.3 million. Our effective tax rate for the three
months ended June 30, 2012 was approximately 34.3% as compared to 30.5% for the
three months ended June 30, 2011. Our pre-tax results for the three months ended
June 30, 2012 include approximately $5.1 million of in-kind research and
development expenses which are non-deductible for tax purposes. In addition, we
recognized a benefit totaling approximately $3.8 million in the three months
ended June 30, 2011 attributable to changes in uncertain tax positions. We
operate in the U.S. taxing jurisdiction and various other taxing jurisdictions
outside of the U.S. Each of these jurisdictions has a regime of taxation that
varies from the others. The taxation regimes vary not only with respect to
nominal rates, but also with respect to the basis on which these rates are
applied. These variances, along with variances in our mix of income from these
jurisdictions, contribute to shifts in our effective tax rate.
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RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2012 VS. SIX MONTHS ENDED JUNE
30, 2011
The Babcock & Wilcox Company (Consolidated)
Revenues increased approximately 12.1%, or $174.9 million, to $1,618.5 million
in the six months ended June 30, 2012 compared to $1,443.6 million for the
corresponding period in 2011 primarily due to increases in revenues from our
Power Generation segment totaling $166.5 million. We also experienced decreases
in revenues in our Nuclear Operations, Technical Services and Nuclear Energy
segments totaling $7.5 million, $5.8 million and $5.1 million, respectively.
Operating income increased $69.9 million to $155.1 million in the six months
ended June 30, 2012 from $85.2 million for the corresponding period in 2011, due
primarily to increases in our Nuclear Energy and Power Generation segments
totaling $41.0 million and $19.7 million, respectively. We also experienced
increases in our Nuclear Operations and Technical Services segments totaling
$6.8 million and $6.4 million, respectively. These increases were partially
offset by increased Unallocated Corporate expenses of $4.1 million.
Power Generation
Revenues increased 22.4%, or $166.5 million, to $911.3 million in the six months
ended June 30, 2012, compared to $744.8 million in the corresponding period of
2011, primarily attributable to an increase in revenues of $90.3 million from
our new-build environmental equipment business principally driven by the
beginning of projects as a result of new environmental rules and regulations. In
addition, revenues in our new-build steam generation systems business increased
$81.6 million primarily due to increased activities on waste-to-energy and
biomass boiler projects. Revenues in our aftermarket services business were flat
as a result of increased environmental aftermarket equipment upgrade and
retrofit activities, offset by lower boiler retrofit project activities.
Operating income increased $19.7 million to $74.4 million in the six months
ended June 30, 2012 compared to $54.7 million in the corresponding period of
2011, mainly due to the increases in revenues discussed above, partially offset
by more competitive profit margins on early market new-build environmental
equipment projects and favorable project close-outs in 2011. These increases
were also partially offset by increased selling, general and administrative
expenses totaling $1.9 million, increased warranty expense totaling $2.1 million
attributable to the increases in revenues discussed above, and increased
research and development expenses totaling $1.8 million for the period in 2012
as compared to 2011. We also experienced decreased equity in income of investees
totaling $5.2 million, primarily attributable to lower production and project
activities at our joint venture in China.
Nuclear Operations
Revenues decreased by 1.4%, or $7.5 million, to $515.6 million in the six months
ended June 30, 2012 compared to $523.1 million in the corresponding period of
2011, due to lower revenues totaling $9.3 million in the manufacturing of
nuclear components for U.S. Government programs. These decreases were partially
offset by increased revenues totaling $1.8 million from our naval nuclear fuel
and downblending activities.
Operating income increased $6.8 million to $96.5 million in the six months ended
June 30, 2012 compared to $89.7 million in the corresponding period of 2011,
primarily due to improved contract performance for the manufacturing of nuclear
components for U.S. Government programs totaling $10.9 million. Included in
operating income for 2011 is a $10.9 million gain resulting from a favorable
settlement with the previous owner of NFS. Excluding the settlement gain, our
naval nuclear fuel and downblending activities improved $6.8 million compared to
2011 due to improved contract performance.
Technical Services
Revenues decreased 9.8%, or $5.8 million, to $53.2 million in the six months
ended June 30, 2012 compared to $59.0 million for the corresponding period of
2011, primarily attributable to a decrease in activity and our specialty
manufacturing work scope associated with the American Centrifuge Program.
Operating income increased $6.4 million to $33.0 million in the six months ended
June 30, 2012 compared to $26.6 million in the corresponding period of 2011.
This increase is due to additional equity in income of investees
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totaling $5.5 million principally from new government contract awards and a $1.2
million gain from the sale of our interest in a joint venture associated with
the management and operations of the Strategic Petroleum Reserve.
Nuclear Energy
Revenues decreased 3.2%, or $5.1 million, to $154.0 million in the six months
ended June 30, 2012 compared to $159.1 million in the corresponding period of
2011 primarily attributable to decreases in our nuclear equipment business of
$32.4 million related to reduced project scope completion on a replacement steam
generator project, partially offset by increased activity in our nuclear
services business of $24.0 million principally due to timing of customer outage
projects. For the six months ended June 30, 2012, revenues in our nuclear
projects business included $18.4 million as a result of the May 2012 claims
settlement agreement reached with Energy Northwest related to a condenser
replacement project at Columbia Generating Station in 2011.
Operating income increased $41.0 million to a loss of $29.8 million in the six
months ended June 30, 2012 compared to a loss of $70.8 million in the
corresponding period of 2011, due to $47.6 million of project costs to complete
the condenser replacement project at Columbia Generating Station recognized
during the six months ended June 30, 2011 and $18.1 million (net of related
expenses) recognized in the six months ended June 30, 2012 associated with the
May 2012 settlement discussed above. In addition, operating income in our
nuclear services business increased by $9.1 million associated with the
increased revenue discussed above. These increases were partially offset by $5.9
million of reduced operating income in our nuclear equipment business associated
with the revenue decreases discussed above and $20.9 million of increased
research and development costs related to the continued development of the B&W
mPower™ reactor. In addition, we experienced increases in selling, general and
administrative expenses totaling $6.4 million related to the continued expansion
of our presence in the commercial nuclear energy industry.
The increase in research and development costs discussed above includes
recognition of $8.7 million of research and development costs related to the
consolidation of Generation mPower LLC ("GmP"), our majority-owned subsidiary
overseeing the program to develop the small modular nuclear power plant based on
B&W mPower™ technology. These costs represent non-cash, non-deductible expenses
related to the value of the in-kind research and development services
contributed to the program by GmP's minority partner.
For any period, the impact to net income attributable to The Babcock & Wilcox
Company of these in-kind services will depend on the timing of services provided
by our partner. For the six months ended June 30, 2012, the value of the in-kind
services exceeded the amount of research and development costs allocated to the
minority partner. As a result, net income attributable to The Babcock & Wilcox
Company, after taking into account the non-cash non-controlling interest
recognition totaling $5.7 million, was negatively impacted by $3.0 million. We
expect to recognize a positive impact to net income attributable to The
Babcock & Wilcox Company in future periods when the value of the in-kind
services received is less than the minority partner's proportional share of
development costs for the period.
This accounting treatment has also resulted in $11.0 million of non-controlling
interest accumulated on our consolidated balance sheet at June 30, 2012. We have
not incurred a present liability for the in-kind services received as part of
the development program and our minority partner does not currently have rights
to share in the net assets of B&W or GmP.
Corporate
Unallocated corporate expenses increased $4.1 million to $19.2 million for the
six months ended June 30, 2012, as compared to $15.1 million for the
corresponding period in 2011, mainly due to increased information technology
expenses attributable to timing, and higher incentive compensation expenses in
2012 compared to 2011.
Other Income Statement Items
Other income increased $1.8 million to $2.2 million for the six months ended
June 30, 2012, compared to $0.4 million for the corresponding period in 2011,
primarily due to favorable movements in foreign currency exchange rates.
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Provision for Income Taxes
For the six months ended June 30, 2012, our provision for income taxes increased
$26.7 million to $52.3 million, while income before provision for income taxes
increased $71.7 million. Our effective tax rate for the six months ended
June 30, 2012 was approximately 33.2% as compared to 29.9% for the six months
ended June 30, 2011. Our pre-tax results for the six months ended June 30, 2012
include approximately $8.7 million of in-kind research and development expenses
which are non-deductible for tax purposes. In addition, in the six months ended
June 30, 2011, we recognized a benefit totaling approximately $3.8 million
attributable to changes in uncertain tax positions and a $2.5 million benefit
attributable to settlements with tax authorities. We operate in the U.S. taxing
jurisdiction and various other taxing jurisdictions outside of the U.S. Each of
these jurisdictions has a regime of taxation that varies from the others. The
taxation regimes vary not only with respect to nominal rates, but also with
respect to the basis on which these rates are applied. These variances, along
with variances in our mix of income from these jurisdictions, contribute to
shifts in our effective tax rate.
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.
June 30, December 31,
2012 2011
(Unaudited)
(In millions)
Power Generation $ 2,529 $ 1,947
Nuclear Operations 2,860 2,995
Technical Services 14 14
Nuclear Energy 310 383
Total Backlog $ 5,713 $ 5,339
We do not include the value of our unconsolidated joint venture contracts in
backlog. These unconsolidated joint ventures are included in our Power
Generation and Technical Services segments.
Of the June 30, 2012 backlog, we expect to recognize revenues as follows:
2012 2013 Thereafter Total
(Unaudited)
(In approximate millions)
Power Generation $ 690 $ 745 $ 1,094 $ 2,529
Nuclear Operations 560 950 1,350 2,860
Technical Services 14 - - 14
Nuclear Energy 120 145 45 310
Total Backlog $ 1,384 $ 1,840 $ 2,489 $ 5,713
At June 30, 2012, Power Generation backlog with the U.S. Government was $2.8
million, all of which was fully funded.
At June 30, 2012, Nuclear Operations backlog with the U.S. Government was $2.9
billion, which was substantially fully funded.
At June 30, 2012, Technical Services backlog with the U.S. Government was $14.1
million, all of which was fully funded.
At June 30, 2012, Nuclear Energy had no backlog with the U.S. Government.
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Liquidity and Capital Resources
Credit Facility
On June 8, 2012, B&W entered into an 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 May 3, 2010. The New Credit
Agreement provides for revolving credit borrowings and issuances of letters of
credit in an aggregate outstanding amount of up to $700 million and the New
Credit Agreement is scheduled to mature on June 8, 2017. The proceeds of the New
Credit Agreement are available for working capital needs and other general
corporate purposes. The New Credit Agreement includes procedures for additional
financial institutions to become lenders, or for any existing lender to increase
its commitment thereunder, subject to an aggregate maximum of $1.0 billion for
all revolving loan 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 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.
The New Credit Agreement requires only interest payments on a periodic basis
until maturity. 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 certain notice requirements.
The New Credit Agreement contains customary 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 June 30, 2012, 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 2.25% per year
or the base rate (the highest of the Federal Funds rate plus 0.50%, the one
month Eurocurrency rate plus 1.0%, or the administrative agent's prime rate)
plus a margin ranging from 0.25% to 1.25% per year. The applicable margin for
revolving 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 portion of the New Credit Agreement and that fee varies between
0.225% 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 1.25%
and 2.25% 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
0.80% and 1.25% 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 June 30,
2012, there were no borrowings outstanding and letters of credit issued under
the New Credit Agreement totaled $208.6 million, resulting in $491.4 million
available for borrowings or to meet letter of credit requirements. The
applicable interest rate at June 30, 2012 under this facility was 3.75% per year
for revolving loans.
Based on the current credit ratings of the New Credit Agreement, the applicable
margin for Eurocurrency loans is 1.50%, the applicable margin for base rate
loans is 0.50%, the letter of credit fee for financial letters of credit is
1.50%, the letter of credit fee for performance letters of credit is 0.875%, and
the commitment fee for unused portions of the New Credit Agreement is 0.25%. 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.
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Other Arrangements
Certain foreign subsidiaries of Babcock & Wilcox Power Generation Group, Inc.
have credit arrangements with various commercial banks and other financial
institutions for the issuance of bank guarantees in association with contracting
activity. The aggregate value of all such bank guarantees as of June 30, 2012
was $49.0 million.
B&W and certain of its subsidiaries have jointly executed general agreements of
indemnity in favor of surety underwriters relating to surety bonds those
underwriters issue in support of some of our contracting activity. As of
June 30, 2012, bonds issued and outstanding under these arrangements in support
of contracts totaled approximately $421.6 million.
Other
In aggregate, our cash and cash equivalents, restricted cash and cash
equivalents and investments decreased by $125.3 million to $425.8 million at
June 30, 2012 from $551.1 million at December 31, 2011 primarily due to cash
used in investing and operating activities. In the six months ended June 30,
2012, we made contributions to our pension plans totaling $185.6 million, which
substantially completes our funding for 2012. In addition, we expect to generate
positive cash flow from operations for the remainder of 2012.
Our net cash used in operations was $74.7 million in the six months ended
June 30, 2012, compared to $51.6 million for the six months ended June 30, 2011.
This increase in cash used was primarily attributable to changes in accrued
employee benefits, due to increased funding of our pension plans, and our net
contracts in progress and advance billings, partially offset by changes in
accounts receivable and prepaid expenses.
Our net cash used in investing activities increased by $35.0 million to $128.9
million in the six months ended June 30, 2012 from $93.9 million in the six
months ended June 30, 2011. This increase in net cash used in investing
activities was primarily attributable to additional purchases of investments in
the current period partially offset by higher investments in unconsolidated
affiliates in the prior period.
Our net cash from financing activities decreased by $8.9 million to cash used in
financing activities of $2.3 million in the six months ended June 30, 2012 from
$6.6 million provided by financing activities for the six months ended June 30,
2011. This decrease in net cash from financing activities was primarily
attributable to payments of debt issuance costs in the current period and less
cash from the exercise of stock options in the current period compared to the
prior period.
At June 30, 2012, we had restricted cash and cash equivalents totaling
approximately $59.5 million, $6.1 million of which was held in restricted
foreign accounts, $2.8 million of which was held for future decommissioning of
facilities (which we include in other assets on our condensed consolidated
balance sheets), $50.1 million of which was held to meet reinsurance reserve
requirements of our captive insurer (in lieu of long-term investments) and $0.5
million of which was held in money market funds maintained by our captive
insurer.
At June 30, 2012, we had investments with a fair value of $159.5 million. Our
investment portfolio consists primarily of investments in government obligations
and short-term commercial paper. Our investments are classified as available for
sale and are carried at fair value with unrealized gains and losses, net of tax,
reported as a component of other comprehensive loss.
Foreign Operations
Included in our total unrestricted cash and cash equivalents is approximately
$149.3 million or 72% related to foreign operations and subsidiaries. In
general, these resources are not available to fund our U.S. operations unless
the funds are repatriated to the United States, which would expose us to 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.
