NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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:
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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.
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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.
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Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy (DOE)/National Nuclear Security
Administrations (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 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
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9
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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.
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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 segments operations are conducted through joint ventures.
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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.
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Our mPower segment is designing the B&W mPower
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
mPower
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 commercial operation date by 2022. 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 expect to slow the pace of development and 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. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.
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See Note 10 for further information regarding our segments.
Operating results for the three and six months ended June 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 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
10
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 six months ended June 30, 2014, we recorded contract losses totaling $4.0 million and $11.6 million, respectively, for
additional estimated costs to complete our Power Generation segments Berlin Station project, which includes estimated potential letter of credit draws for liquidated damages. These losses are in addition to contract losses recorded for this
project during 2013 and 2012. We had previously asserted that substantial completion had been achieved on this project in early 2014 and that any further delays to complete this project, beyond the delays already caused by the customer during
construction or otherwise excusable under the contract, are the result of the customers failure to supply fuel complying with the contract specifications. The customer has certified that we achieved substantial completion on the project
effective July 19, 2014, following which the customer will have no further claims for Delay LDs. See Note 6 for legal proceedings associated with this matter.
Comprehensive Income
The
components of accumulated other comprehensive income included in stockholders equity are as follows:
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June 30,
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December 31,
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2014
|
|
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2013
|
|
|
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(In thousands)
|
|
Currency translation adjustments
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$
|
31,277
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|
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$
|
38,415
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Net unrealized gain on investments
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|
|
207
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|
|
|
130
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Net unrealized gain on derivative financial instruments
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438
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|
|
|
627
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Unrecognized prior service cost on benefit obligations
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(10,030
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)
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|
(10,824
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)
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|
|
|
|
|
|
|
|
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Accumulated other comprehensive income
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$
|
21,892
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|
|
$
|
28,348
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|
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|
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11
The amounts reclassified out of accumulated other comprehensive income by component and the
affected condensed consolidated statements of income line items are as follows:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2014
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|
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2013
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|
|
2014
|
|
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2013
|
|
|
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Accumulated Other Comprehensive Income
Component Recognized
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(In thousands)
|
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Line Item Presented
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Realized (losses) gains on derivative financial instruments
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$
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(240
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)
|
|
$
|
(621
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)
|
|
$
|
(77
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)
|
|
$
|
(1,152
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)
|
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Revenues
|
|
|
|
1,153
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|
|
|
(1,117
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)
|
|
|
127
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|
|
|
(2,006
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)
|
|
Cost of operations
|
|
|
|
|
|
|
|
101
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|
|
|
10
|
|
|
|
116
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|
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Other-net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
913
|
|
|
|
(1,637
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)
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|
$
|
60
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|
|
|
(3,042
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)
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Total before tax
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|
|
|
(234
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)
|
|
|
395
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|
|
|
(13
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)
|
|
|
753
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|
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Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
679
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|
|
$
|
(1,242
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)
|
|
$
|
47
|
|
|
$
|
(2,289
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)
|
|
Net Income
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|
|
|
|
|
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Amortization of prior service cost on benefit obligations
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|
$
|
(509
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)
|
|
$
|
(660
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)
|
|
$
|
(1,018
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)
|
|
$
|
(1,411
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)
|
|
Cost of operations
|
|
|
|
(86
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)
|
|
|
(50
|
)
|
|
|
(171
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)
|
|
|
(100
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)
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(595
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)
|
|
|
(710
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)
|
|
|
(1,189
|
)
|
|
|
(1,511
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)
|
|
Total before tax
|
|
|
|
198
|
|
|
|
245
|
|
|
|
395
|
|
|
|
518
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|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(397
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)
|
|
$
|
(465
|
)
|
|
$
|
(794
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)
|
|
$
|
(993
|
)
|
|
Net Income
|
|
|
|
|
|
|
Realized gain on investments
|
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
41
|
|
|
$
|
724
|
|
|
Other-net
|
|
|
|
(3
|
)
|
|
|
(3
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)
|
|
|
(15
|
)
|
|
|
(3
|
)
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
26
|
|
|
$
|
721
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassification for the period
|
|
$
|
286
|
|
|
$
|
(1,700
|
)
|
|
$
|
(721
|
)
|
|
$
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Inventories
The components of inventories are as follows:
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|
|
|
|
|
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June 30,
|
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December 31,
|
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|
|
2014
|
|
|
2013
|
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|
(In thousands)
|
|
Raw materials and supplies
|
|
$
|
82,485
|
|
|
$
|
85,455
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|
Work in progress
|
|
|
9,986
|
|
|
|
10,872
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|
Finished goods
|
|
|
20,500
|
|
|
|
16,731
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
112,971
|
|
|
$
|
113,058
|
|
|
|
|
|
|
|
|
|
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Restricted Cash and Cash Equivalents
At June 30, 2014, we had restricted cash and cash equivalents totaling $42.3 million, $3.3 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 $36.4 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 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
12
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 units goodwill with the carrying amount of that goodwill.
The following summarizes the changes in the
carrying amount of goodwill:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
Generation
|
|
|
Nuclear
Operations
|
|
|
Technical
Services
|
|
|
Nuclear
Energy
|
|
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Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
104,630
|
|
|
$
|
118,103
|
|
|
$
|
45,000
|
|
|
$
|
13,975
|
|
|
$
|
281,708
|
|
Acquisition of MEGTEC (Note 2)
|
|
|
115,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,314
|
|
Foreign currency translation adjustments and other
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
219,751
|
|
|
$
|
118,103
|
|
|
$
|
45,000
|
|
|
$
|
13,975
|
|
|
$
|
396,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 its carrying amount 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 assets to its carrying amount. If the carrying amount of the intangible assets 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
56,436
|
|
|
$
|
83,682
|
|
Additions
|
|
|
5,463
|
|
|
|
11,423
|
|
Acquisition of MEGTEC
|
|
|
4,693
|
|
|
|
|
|
Expirations and other changes
|
|
|
(3,204
|
)
|
|
|
(8,038
|
)
|
Payments
|
|
|
(4,568
|
)
|
|
|
(11,659
|
)
|
Translation and other
|
|
|
5
|
|
|
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
58,825
|
|
|
$
|
74,487
|
|
|
|
|
|
|
|
|
|
|
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
13
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, 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 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 mPower
reactor and the associated mPower Plant.
During the three and six months ended June 30, 2014, we recognized $1.6 million and $5.8 million, respectively, of non-cash in-kind
research and development costs as compared to $4.4 million and $7.4 million during the three and six months ended June 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 DOEs 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. The DOE has authorized $105.5 million of funding to B&W for this award
program. Congress has allocated and designated an additional $79 million from the 2014 budget to the Cooperative Agreement; however, the DOE has not yet obligated those funds to us. In the six months ended June 30, 2014 and 2013, we recognized
$19.8 million and $37.8 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 expect to slow the pace of development and 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. 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 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 June 30, 2014 was approximately 32.8% as compared to 29.8% for the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014
14
was lower than our statutory rate primarily due to the impact of an increase in benefits for amended federal manufacturing deductions and certain amended state return filings, offset by an
increase to a valuation allowance against certain state deferred tax assets. The effective tax rate for the three months ended June 30, 2013 was lower than the effective tax rate for the period ended June 30, 2014 primarily due to the
impact of settling claims within certain state and foreign jurisdictions in the prior year period.
Our effective tax rate for the six
months ended June 30, 2014 was approximately 27.7% as compared to 28.6% for the six months ended June 30, 2013. The effective tax rate for the six months ended June 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. Our effective tax rate for the
six months ended June 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, for which we have not recognized a benefit in 2014 due to the current expiration of the tax credit.
As of June 30, 2014, we have gross unrecognized tax benefits of $5.9 million, which, if recognized, would lower our effective tax rate
from continuing operations.
Recently Adopted Accounting Standards
In April 2014, the Financial Accounting Standards Board (FASB) issued an update to the Topics
Presentation of Financial
Statements
and
Property, Plant and Equipment
. This update changes the criteria for reporting discontinued operations such that a disposal of a component of an entity will be required to be reported in discontinued operations if the
disposal represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. We early adopted this pronouncement in the second quarter of 2014. The disposal of our Nuclear Projects business in
the second quarter of 2014 did not qualify as a discontinued operation under the new guidance due to its relative insignificance to B&Ws operations and financial results. See Note 2 for additional information related to this disposal.
New Accounting Standards
In May
2014, the FASB issued
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in the Topic
Revenue Recognition
and most industry specific guidance. The core principle of this guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This update is
effective in 2017, and early adoption is not permitted. The update may be adopted either retrospectively to each prior period or as a cumulative-effect adjustment on the date of adoption. We are currently evaluating the impact of the adoption of
this standard on our consolidated 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 $142.2 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 segments environmental
products and solutions offerings that serves utility markets.
15
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)
|
|
Unrestricted cash
|
|
$
|
14,232
|
|
Accounts receivable
|
|
$
|
23,459
|
|
Inventories
|
|
$
|
5,528
|
|
Other current assets
|
|
$
|
9,069
|
|
Property, plant and equipment
|
|
$
|
5,090
|
|
Goodwill
|
|
$
|
115,314
|
|
Intangible assets
|
|
$
|
42,000
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
214,692
|
|
|
|
|
|
|
|
|
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
|
|
$
|
156,406
|
|
Unrestricted cash acquired
|
|
$
|
14,232
|
|
|
|
|
|
|
Net assets acquired, net of unrestricted cash acquired
|
|
$
|
142,174
|
|
|
|
|
|
|
|
|
Amount of tax deductible goodwill
|
|
$
|
|
|
|
|
|
|
|
The 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 six months ended June 30, 2014 include
$3.6 million and $0.2 million of revenues and net income, respectively, related to MEGTEC operations occurring from the acquisition date to June 30, 2014. Additionally, the following unaudited pro forma financial information presents our
results of operations for the three and six months ended June 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Revenues
|
|
$
|
772,972
|
|
|
$
|
933,793
|
|
|
$
|
1,428,355
|
|
|
$
|
1,768,672
|
|
|
|
|
|
|
Net Income Attributable to The Babcock & Wilcox Company
|
|
$
|
28,780
|
|
|
$
|
74,139
|
|
|
$
|
74,530
|
|
|
$
|
119,313
|
|
|
|
|
|
|
Basic Earnings per Common Share
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.68
|
|
|
$
|
1.06
|
|
Diluted Earnings per Common Share
|
|
$
|
0.26
|
|
|
$
|
0.66
|
|
|
$
|
0.67
|
|
|
$
|
1.05
|
|
16
The unaudited pro forma results include the following pre-tax adjustments to the historical
results presented above:
|
|
|
Additional amortization expense related to the fair value of identifiable intangible assets acquired of approximately $0.8 million and $1.3 million for the three and six months ended June 30, 2014, respectively,
and $2.8 million and $5.6 million for the three and six months ended June 30, 2013, respectively.
|
|
|
|
Elimination of historical interest expense of approximately $0.6 million and $0.9 million for the three and six months ended June 30, 2014, respectively, and $0.4 million and $0.9 million for the three and six
months ended June 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 $0.6 million and $1.2 million for the three and six
months ended June 30, 2014, respectively, and $0.6 million and $1.3 million for the three and six months ended June 30, 2013, respectively.
|
|
|
|
Elimination of $13.5 million in acquisition related costs recognized in the three and six months ended June 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 segments 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 $(0.1)
million in the three and six months ended June 30, 2014, respectively, and $(0.5) million and $(1.0) million in the three and six months ended June 30, 2013, respectively.
At June 30, 2014, assets recorded within the condensed consolidated financial statements for the Nuclear Projects business include $37.5
million in outstanding accounts receivable and $8.2 million in contracts in progress related to unbilled final project closeout activities. Both of those amounts relate 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 owner has questioned the reasonableness of certain project costs, assessed 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 mechanics lien in the amount of $37.4 million against the owners property
on July 11, 2014 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 and unbilled 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.
NOTE 3 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.
17
The New Credit Agreement is guaranteed by substantially all of B&Ws 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 Moodys 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&Ws current corporate family
rating from Moodys 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 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 June 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 agents 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 June 30, 2014, borrowings outstanding totaled $150.0 million and $113.8 million under our term loan and revolving line of credit, respectively, and letters of credit issued under the New Credit Agreement totaled $173.0
million, resulting in $863.2 million available for borrowings or to meet letter of credit requirements.
Based on the current credit
ratings of the New Credit Agreement, beginning in August 2014 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.
NOTE 4 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 six months ended June 30, 2014, we incurred $0.2 million of expenses related to employee termination benefits and $2.2 million of expenses related to facility
consolidation. During the six months ended June 30, 2013, we recorded $15.1 million of expenses related to employee termination benefits and $5.6 million of expenses related to consulting and administrative costs.
18
Other Restructuring Actions
In the first quarter of 2014, we announced a business optimization project focused on increasing margins in our Power Generation and Nuclear
Energy segments. In the six months ended June 30, 2014, we incurred $9.4 million of expenses related to this project, including $8.5 million of expenses related to employee termination benefits, $0.7 million of expenses related to consulting
and administrative costs and $0.2 million of expenses related to facility consolidation.
In the six months ended June 30, 2014, we
also incurred $7.9 million of expenses related to the restructuring of our mPower program, including $5.7 million of expenses related to employee termination benefits, $2.0 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 six months ended June 30, 2014 related to the restructuring of our Technical Services segment.
The
following summarizes the changes in our restructuring liability for the six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
10,054
|
|
|
$
|
|
|
Special charges for restructuring activities
(1)
|
|
|
17,743
|
|
|
|
20,655
|
|
Payments
|
|
|
(11,327
|
)
|
|
|
(10,705
|
)
|
Translation and other
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
16,463
|
|
|
$
|
9,950
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes non-cash charges of $2.4 million for the six months ended June 30, 2014, which did not impact the restructuring liability.
|
At June 30, 2014, unpaid restructuring charges totaled $16.3 million for employee termination benefits and $0.2 million for consulting
and administrative costs.
NOTE 5 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
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
9,651
|
|
|
$
|
11,542
|
|
|
$
|
19,297
|
|
|
$
|
23,120
|
|
|
$
|
216
|
|
|
$
|
248
|
|
|
$
|
432
|
|
|
$
|
496
|
|
Interest cost
|
|
|
30,361
|
|
|
|
27,838
|
|
|
|
60,688
|
|
|
|
55,626
|
|
|
|
977
|
|
|
|
993
|
|
|
|
1,946
|
|
|
|
1,898
|
|
Expected return on plan assets
|
|
|
(37,389
|
)
|
|
|
(36,611
|
)
|
|
|
(74,766
|
)
|
|
|
(73,281
|
)
|
|
|
(575
|
)
|
|
|
(537
|
)
|
|
|
(1,150
|
)
|
|
|
(1,075
|
)
|
Amortization of prior service cost (credit)
|
|
|
635
|
|
|
|
792
|
|
|
|
1,269
|
|
|
|
1,584
|
|
|
|
(40
|
)
|
|
|
(82
|
)
|
|
|
(80
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,258
|
|
|
$
|
3,561
|
|
|
$
|
6,488
|
|
|
$
|
7,049
|
|
|
$
|
578
|
|
|
$
|
622
|
|
|
$
|
1,148
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made contributions to our pension and postretirement benefit plans totaling $18.4 million and $27.0 million
during the three and six months ended June 30, 2014, respectively, as compared to $18.0 million and $43.2 million in the three and six months ended June 30, 2013, respectively.
19
NOTE 6 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 in May 2014. In total, the suits presently involve approximately 100 primary claimants, including the five additional primary claims filed in May 2014. Plaintiffs
have filed motions to dismiss, with prejudice, 3 claims and have agreed to dismiss, with prejudice, 3 additional claims, which would reduce the total number of primary claimants to 94. 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 Apollo Borough 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.
At the time of ARCOs 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 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 ARCOs indemnification of B&W PGG relating to the two facilities, ARCO assigned to the B&W Parties 58.33% of the total of all
ARCOs 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 ANIs 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 ARCOs 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
20
Parties and ARCOs 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 courts evidentiary rulings; and (2) any defenses and arguments of any kind except ANIs 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 Courts decision to the Pennsylvania Supreme Court. On January 24, 2014, the Supreme Court of Pennsylvania granted B&W and
ARCOs request for appeal. The parties briefs on the appeal have been filed, but the date for oral arguments has not been set. 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 (1) material claims by BWCC against its customer for contract changes relating to schedule delays, delay costs and
extra work and (2) whether liquidated damages for delay (Delay LDs) are due to the customer under the contract. The customer contends it is owed Delay LDs, capped under the terms of the contract at approximately $18.7 million, and
has made nine partial draws totaling approximately $11.0 million against $44 million of letters of credit from BWCC that were outstanding as of the date of filing of this report. These draws correspond to a total of approximately $11.9 million in
alleged Delay LDs. BWCC had previously asserted that substantial completion had been achieved in early 2014 and that any further delays to completion of the project, beyond the delays already caused by the customer during construction or otherwise
excusable under the contract are the result of the customers failure to supply fuel complying with the contract specifications. BWCCs motion for an injunction to prevent further draws on BWCCs letters of credit for such claims was
denied on May 21, 2014 and a related temporary restraining order against the customer was vacated on the same date. The customer has certified that BWCC achieved substantial completion on the project effective July 19, 2014, following which the
customer will have no further claims for Delay LDs.
BWCCs aggregate liquidated damages cap under the contract is approximately
$37.4 million, which also includes an $18.7 million cap for performance LDs. There is a risk that the customer will attempt to call all or part of the 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. As of June 30, 2014, we had made provisions in our financial statements totaling $12.8 million based on Delay LDs called to date and managements estimation of further calls against the
letters of credit and had not recorded offsetting claims revenue in our financial statements.
BWCC has submitted claims to the customer
based on the customers failure to supply fuel complying with the contract specifications that has resulted (and continues to result) in further delays, reduced plant performance abilities and damage to plant equipment. Following the
customers denial of BWCCs change order request relating to schedule delays, delay costs and extra work, 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, BWCCs 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. BWCC is considering its response to the New Hampshire
suit and still intends to seek recovery of damages incurred to date in excess of $50 million.
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 BWCCs letters of credit. However, it is premature to predict the outcome of this matter. The litigation could be
lengthy, and if BWCCs customer were to prevail completely or substantially in this matter, the outcome could have a material adverse effect on our financial statements.
21
NOTE 7 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 derivatives 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 forward contracts attributable to the difference between FX spot rates and FX forward rates. At June 30, 2014, we had deferred approximately $0.4 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 June 30, 2014, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts
totaled $71.6 million at June 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.
The following tables summarize our derivative financial instruments at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Asset and Liability Derivatives
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
|
FX Forward Contracts:
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Accounts receivable-other
|
|
$
|
73
|
|
|
$
|
1,139
|
|
Other assets
|
|
$
|
57
|
|
|
$
|
94
|
|
Accounts payable
|
|
$
|
398
|
|
|
$
|
581
|
|
Other liabilities
|
|
$
|
203
|
|
|
$
|
603
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
|
|
|
|
|
|
|
FX Forward Contracts:
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Accounts receivable-other
|
|
$
|
614
|
|
|
$
|
464
|
|
Other assets
|
|
$
|
9
|
|
|
$
|
50
|
|
Accounts payable
|
|
$
|
26
|
|
|
$
|
10
|
|
Other liabilities
|
|
$
|
5
|
|
|
$
|
|
|
22
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effects of Derivative Instruments on our
Financial Statements
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 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
|
|
$
|
1,122
|
|
|
$
|
(2,212
|
)
|
|
$
|
(192
|
)
|
|
$
|
(5,210
|
)
|
Gain (loss) reclassified from accumulated other comprehensive income into earnings: effective portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
Revenues
|
|
$
|
(240
|
)
|
|
$
|
(621
|
)
|
|
$
|
(77
|
)
|
|
$
|
(1,152
|
)
|
Cost of operations
|
|
$
|
1,153
|
|
|
$
|
(1,117
|
)
|
|
$
|
127
|
|
|
$
|
(2,006
|
)
|
Other-net
|
|
$
|
|
|
|
$
|
101
|
|
|
$
|
10
|
|
|
$
|
116
|
|
|
|
|
|
|
Gain recognized in income: portion excluded from effectiveness testing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
Other-net
|
|
$
|
211
|
|
|
$
|
161
|
|
|
$
|
278
|
|
|
$
|
353
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX Forward Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
Other-net
|
|
$
|
(280
|
)
|
|
$
|
93
|
|
|
$
|
155
|
|
|
$
|
(583
|
)
|
NOTE 8 FAIR VALUE MEASUREMENTS
Investments
The
following is a summary of our available-for-sale securities measured at fair value at June 30, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/14
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Mutual funds
|
|
$
|
4,146
|
|
|
$
|
|
|
|
$
|
4,146
|
|
|
$
|
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
357
|
|
|
|
|
|
|
|
357
|
|
|
|
|
|
Commercial paper
|
|
|
4,249
|
|
|
|
|
|
|
|
4,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,752
|
|
|
$
|
|
|
|
$
|
8,752
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
23
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
June 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 $0.1 million and $0.6 million, respectively.
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 June 30, 2014 and December 31, 2013.
NOTE 9 STOCK-BASED COMPENSATION
Total stock-based compensation expense for all of our plans recognized for the three and six months ended June 30, 2014
totaled $5.9 million and $7.8 million, respectively, with associated tax benefit recognized for the three and six months ended June 30, 2014 totaling $2.3 million and $3.0 million, respectively.
Total stock-based compensation expense for all of our plans recognized for the three and six months ended June 30, 2013 totaled $5.2
million and $9.7 million, respectively, with associated tax benefit recognized for the three and six months ended June 30, 2013 totaling $2.0 million and $3.7 million, respectively.
24
NOTE 10 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Generation
|
|
$
|
327,379
|
|
|
$
|
471,191
|
|
|
$
|
639,457
|
|
|
$
|
932,654
|
|
Nuclear Operations
|
|
|
293,438
|
|
|
|
330,986
|
|
|
|
579,652
|
|
|
|
592,125
|
|
Technical Services
|
|
|
26,015
|
|
|
|
27,432
|
|
|
|
50,470
|
|
|
|
52,661
|
|
Nuclear Energy
|
|
|
44,927
|
|
|
|
63,185
|
|
|
|
92,707
|
|
|
|
126,701
|
|
mPower
|
|
|
|
|
|
|
333
|
|
|
|
278
|
|
|
|
637
|
|
Adjustments and Eliminations
(1)
|
|
|
(5,753
|
)
|
|
|
(6,991
|
)
|
|
|
(14,541
|
)
|
|
|
(13,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
686,006
|
|
|
$
|
886,136
|
|
|
$
|
1,348,023
|
|
|
$
|
1,691,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Segment revenues are net of
the following intersegment transfers and other adjustments:
|
|
|
|
|
|
|
Power Generation Transfers
|
|
$
|
1,239
|
|
|
$
|
1,538
|
|
|
$
|
4,220
|
|
|
$
|
2,300
|
|
Nuclear Operations Transfers
|
|
|
1,880
|
|
|
|
1,539
|
|
|
|
4,967
|
|
|
|
2,816
|
|
Technical Services Transfers
|
|
|
|
|
|
|
1,014
|
|
|
|
52
|
|
|
|
1,549
|
|
Nuclear Energy Transfers
|
|
|
2,634
|
|
|
|
2,900
|
|
|
|
5,302
|
|
|
|
6,554
|
|
mPower Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,753
|
|
|
$
|
6,991
|
|
|
$
|
14,541
|
|
|
$
|
13,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Generation
|
|
$
|
15,215
|
|
|
$
|
30,535
|
|
|
$
|
25,757
|
|
|
$
|
63,865
|
|
Nuclear Operations
|
|
|
58,682
|
|
|
|
65,737
|
|
|
|
118,210
|
|
|
|
120,461
|
|
Technical Services
|
|
|
15,078
|
|
|
|
15,235
|
|
|
|
29,867
|
|
|
|
29,414
|
|
Nuclear Energy
|
|
|
1,548
|
|
|
|
7,922
|
|
|
|
2,071
|
|
|
|
10,180
|
|
mPower
|
|
|
(31,933
|
)
|
|
|
(1,104
|
)
|
|
|
(58,642
|
)
|
|
|
(28,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,590
|
|
|
$
|
118,325
|
|
|
$
|
117,263
|
|
|
$
|
195,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate
(1)
|
|
|
(6,002
|
)
|
|
|
(7,387
|
)
|
|
|
(8,377
|
)
|
|
|
(16,295
|
)
|
Special Charges for Restructuring Activities
|
|
|
(17,470
|
)
|
|
|
(12,232
|
)
|
|
|
(20,128
|
)
|
|
|
(20,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(2)
|
|
$
|
35,118
|
|
|
$
|
98,706
|
|
|
$
|
88,758
|
|
|
$
|
158,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
190
|
|
|
|
323
|
|
|
|
609
|
|
|
|
655
|
|
Interest expense
|
|
|
(921
|
)
|
|
|
(789
|
)
|
|
|
(1,820
|
)
|
|
|
(1,607
|
)
|
Other net
|
|
|
580
|
|
|
|
1,005
|
|
|
|
1,902
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(151
|
)
|
|
|
539
|
|
|
|
691
|
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Provision for Income Taxes
|
|
$
|
34,967
|
|
|
$
|
99,245
|
|
|
$
|
89,449
|
|
|
$
|
160,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
1,457
|
|
|
$
|
(7
|
)
|
|
$
|
1,457
|
|
|
$
|
(85
|
)
|
Nuclear Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
163
|
|
Nuclear Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
mPower
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,457
|
|
|
$
|
156
|
|
|
$
|
1,457
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Income of Investees
:
|
|
|
|
|
Power Generation
|
|
$
|
434
|
|
|
$
|
5,202
|
|
|
$
|
2,800
|
|
|
$
|
7,309
|
|
Nuclear Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
|
12,749
|
|
|
|
13,699
|
|
|
|
25,650
|
|
|
|
26,532
|
|
Nuclear Energy
|
|
|
|
|
|
|
(126
|
)
|
|
|
2
|
|
|
|
(279
|
)
|
mPower
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,183
|
|
|
$
|
18,775
|
|
|
$
|
28,452
|
|
|
$
|
33,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
NOTE 11 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to The Babcock & Wilcox Company
|
|
$
|
26,437
|
|
|
$
|
72,870
|
|
|
$
|
71,481
|
|
|
$
|
120,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
109,766,237
|
|
|
|
111,898,819
|
|
|
|
110,102,826
|
|
|
|
112,998,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.24
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
1.06
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to The Babcock & Wilcox Company
|
|
$
|
26,437
|
|
|
$
|
72,870
|
|
|
$
|
71,481
|
|
|
$
|
120,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (basic)
|
|
|
109,766,237
|
|
|
|
111,898,819
|
|
|
|
110,102,826
|
|
|
|
112,998,066
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, restricted stock and performance shares
(1)
|
|
|
350,393
|
|
|
|
763,744
|
|
|
|
398,511
|
|
|
|
701,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares
|
|
|
110,116,630
|
|
|
|
112,662,563
|
|
|
|
110,501,337
|
|
|
|
113,699,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.24
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
1.06
|
|
(1)
|
At June 30, 2014 and 2013, we have excluded from our diluted share calculation 1,373,087 and 1,648,719 shares, respectively, related to stock options, as their effect would have been antidilutive.
|
26