Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission File No. 001-34658

 

 

THE BABCOCK & WILCOX COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   80-0558025

(State of Incorporation

or Organization)

 

(I.R.S. Employer

Identification No.)

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

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

 

 

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

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

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

 

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

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

The number of shares of the registrant’s common stock outstanding at July 31, 2014 was 107,461,329.

 

 

 


Table of Contents

THE BABCOCK & WILCOX COMPANY

I N D E X - F O R M    1 0 - Q

 

     PAGE  

PART I - FINANCIAL INFORMATION

  

Item 1 – Condensed Consolidated Financial Statements

     2   

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

     3   

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

     5   

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

     6   

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

     7   

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

     8   

Notes to Condensed Consolidated Financial Statements

     9   

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

     27   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4 – Controls and Procedures

     41   

PART II - OTHER INFORMATION

  

Item 1 – Legal Proceedings

     42   

Item 1A – Risk Factors

     42   

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

     42   

Item 4 – Mine Safety Disclosures

     42   

Item 6 – Exhibits

     43   

SIGNATURES

     44   

 

1


Table of Contents

PART I

THE BABCOCK & WILCOX COMPANY

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

2


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

 

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

Current Assets:

     

Cash and cash equivalents

   $ 215,918       $ 346,116   

Restricted cash and cash equivalents

     39,660         45,945   

Investments

     4,249         10,748   

Accounts receivable – trade, net

     381,761         360,323   

Accounts receivable – other

     64,325         45,480   

Contracts in progress

     341,019         370,820   

Inventories

     112,971         113,058   

Deferred income taxes

     99,123         97,170   

Other current assets

     70,645         47,764   
  

 

 

    

 

 

 

Total Current Assets

     1,329,671         1,437,424   
  

 

 

    

 

 

 

Property, Plant and Equipment

     1,178,357         1,126,683   

Less accumulated depreciation

     708,789         679,604   
  

 

 

    

 

 

 

Net Property, Plant and Equipment

     469,568         447,079   
  

 

 

    

 

 

 

Investments

     4,503         4,426   
  

 

 

    

 

 

 

Goodwill

     396,829         281,708   
  

 

 

    

 

 

 

Deferred Income Taxes

     96,811         127,076   
  

 

 

    

 

 

 

Investments in Unconsolidated Affiliates

     158,927         184,831   
  

 

 

    

 

 

 

Intangible Assets

     119,852         81,521   
  

 

 

    

 

 

 

Other Assets

     49,892         45,088   
  

 

 

    

 

 

 

TOTAL

   $ 2,626,053       $ 2,609,153   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

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

Current Liabilities:

    

Notes payable and current maturities of long-term debt

   $ 7,447      $ 4,671   

Accounts payable

     199,860        319,774   

Accrued employee benefits

     98,135        163,833   

Accrued liabilities – other

     79,164        58,192   

Advance billings on contracts

     244,257        317,771   

Accrued warranty expense

     58,825        56,436   

Income taxes payable

     8,000        6,551   
  

 

 

   

 

 

 

Total Current Liabilities

     695,688        927,228   
  

 

 

   

 

 

 

Long-Term Debt

     260,050        225   
  

 

 

   

 

 

 

Accumulated Postretirement Benefit Obligation

     47,411        43,194   
  

 

 

   

 

 

 

Environmental Liabilities

     55,342        53,391   
  

 

 

   

 

 

 

Pension Liability

     376,159        336,878   
  

 

 

   

 

 

 

Other Liabilities

     54,408        65,296   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 6)

    

Stockholders’ Equity:

    

Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 121,287,860 and 120,536,910 shares at June 30, 2014 and December 31, 2013, respectively

     1,213        1,205   

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

     —          —     

Capital in excess of par value

     764,668        747,189   

Retained earnings

     706,162        656,916   

Treasury stock at cost, 13,728,384 and 10,068,731 shares at June 30, 2014 and December 31, 2013, respectively

     (373,776     (268,971

Accumulated other comprehensive income

     21,892        28,348   
  

 

 

   

 

 

 

Stockholders’ Equity – The Babcock & Wilcox Company

     1,120,159        1,164,687   

Noncontrolling interest

     16,836        18,254   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,136,995        1,182,941   
  

 

 

   

 

 

 

TOTAL

   $ 2,626,053      $ 2,609,153   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

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

Revenues

   $ 686,006      $ 886,136      $ 1,348,023      $ 1,691,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses:

        

Cost of operations

     512,308        686,043        1,014,615        1,305,740   

Research and development costs

     30,918        837        54,914        29,183   

Losses on asset disposals and impairments, net

     1,457        156        1,457        87   

Selling, general and administrative expenses

     101,918        106,937        196,603        210,537   

Special charges for restructuring activities

     17,470        12,232        20,128        20,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Costs and Expenses

     664,071        806,205        1,287,717        1,566,202   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Income of Investees

     13,183        18,775        28,452        33,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     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   

Provision for Income Taxes

     11,475        29,544        24,803        45,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 23,492      $ 69,701      $ 64,646      $ 114,577   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss Attributable to Noncontrolling Interest

     2,945        3,169        6,835        5,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to The Babcock & Wilcox Company

   $ 26,437      $ 72,870      $ 71,481      $ 120,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Common Share:

        

Basic:

        

Net Income Attributable to The Babcock & Wilcox Company

   $ 0.24      $ 0.65      $ 0.65      $ 1.06   

Diluted:

        

Net Income Attributable to The Babcock & Wilcox Company

   $ 0.24      $ 0.65      $ 0.65      $ 1.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation of earnings per share (Note 11):

        

Basic

     109,766,237        111,898,819        110,102,826        112,998,066   

Diluted

     110,116,630        112,662,563        110,501,337        113,699,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Unaudited)  
     (In thousands)  

Net Income

   $ 23,492      $ 69,701      $ 64,646      $ 114,577   

Other Comprehensive Income (Loss):

        

Currency translation adjustments

     (531     (3,824     (7,142     (7,568

Derivative financial instruments:

        

Unrealized gains (losses) arising during the period, net of tax (provision) benefit of $(289), $505, $50 and $1,342, respectively

     833        (1,707     (142     (3,868

Reclassification adjustment for (gains) losses included in net income, net of tax provision (benefit) of $234, $(395), $13 and $(753), respectively

     (679     1,242        (47     2,289   

Amortization of benefit plan costs, net of tax benefit of $(198), $(245), $(395) and $(518), respectively

     397        465        794        993   

Investments:

        

Unrealized gains arising during the period, net of tax (provision) benefit of $(32), $37, $(57) and $(7), respectively

     57        33        103        128   

Reclassification adjustment for gains included in net income, net of tax provision of $3, $3, $15 and $3, respectively

     (4     (7     (26     (721
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     73        (3,798     (6,460     (8,747
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

     23,565        65,903        58,186        105,830   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Loss Attributable to Noncontrolling Interest

     2,942        3,172        6,839        5,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to The Babcock & Wilcox Company

   $ 26,507      $ 69,075      $ 65,025      $ 111,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

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

Balance December 31, 2013

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

Net income

    —          —          —          71,481        —          —          71,481        (6,835     64,646   

Dividends declared ($0.20 per share)

    —          —          —          (22,235     —          —          (22,235     —          (22,235

Defined benefit obligations

    —          —          —          —          794        —          794        —          794   

Available-for-sale investments

    —          —          —          —          77        —          77        —          77   

Currency translation adjustments

    —          —          —          —          (7,138     —          (7,138     (4     (7,142

Derivative financial instruments

    —          —          —          —          (189     —          (189     —          (189

Exercise of stock options

    135,649        1        3,519        —          —          —          3,520        —          3,520   

Contributions to thrift plan

    196,297        2        6,554        —          —          —          6,556        —          6,556   

Shares placed in treasury

    —          —          —          —          —          (104,805     (104,805     —          (104,805

Stock-based compensation charges

    419,004        5        7,406        —          —          —          7,411        —          7,411   

Contribution of in-kind services

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

Distributions to noncontrolling interests

    —          —          —          —          —          —          —          (409     (409
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014 (unaudited)

    121,287,860      $ 1,213      $ 764,668      $ 706,162      $ 21,892      $ (373,776   $ 1,120,159      $ 16,836      $ 1,136,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2012

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

Net income

    —          —          —          120,044        —          —          120,044        (5,467     114,577   

Dividends declared ($0.16 per share)

    —          —          —          (18,147     —          —          (18,147     —          (18,147

Defined benefit obligations

    —          —          —          —          993        —          993        —          993   

Available-for-sale investments

    —          —          —          —          (593     —          (593     —          (593

Currency translation adjustments

    —          —          —          —          (7,564     —          (7,564     (4     (7,568

Derivative financial instruments

    —          —          —          —          (1,579     —          (1,579     —          (1,579

Exercise of stock options

    101,157        2        1,872        —          —          —          1,874        —          1,874   

Contributions to thrift plan

    233,766        2        6,530        —          —          —          6,532        —          6,532   

Shares placed in treasury

    —          —          —          —          —          (127,773     (127,773     —          (127,773

Stock-based compensation charges

    217,563        2        9,074        —          —          —          9,076        —          9,076   

Contribution of in-kind services

    —          —          —          —          —          —          —          7,369        7,369   

Distributions to noncontrolling interests

    —          —          —          —          —          —          —          (326     (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2013 (unaudited)

    120,160,512      $ 1,202      $ 730,733      $ 450,960      $ 23,985      $ (237,582   $ 969,298      $ 18,053      $ 987,351   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended  
     June 30,  
     2014     2013  
     (Unaudited)  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net Income

   $ 64,646      $ 114,577   

Non-cash items included in net income:

    

Depreciation and amortization

     35,053        33,856   

Income of investees, net of dividends

     (8,517     (18,824

Losses on asset disposals and impairments

     1,457        87   

In-kind research and development costs

     5,830        7,369   

Recognition of losses for pension and postretirement plans

     1,189        1,511   

Stock-based compensation expense

     7,411        9,076   

Excess tax benefits from stock-based compensation

     (552     (3

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

    

Accounts receivable

     (6,635     (37,429

Accounts payable

     (129,471     5,972   

Contracts in progress and advance billings on contracts

     (52,142     (81,571

Inventories

     5,666        11,608   

Income taxes

     (7,890     4,067   

Accrued and other current liabilities

     2,674        9,541   

Pension liability, accrued postretirement benefit obligation and employee benefits

     (35,671     (44,056

Other, net

     9,250        (4,005
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (107,702     11,776   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Decrease in restricted cash and cash equivalents

     6,285        12,680   

Purchases of property, plant and equipment

     (37,822     (33,433

Acquisition of business, net of cash acquired

     (127,098     —     

Purchase of intangible assets

     (722     (2,200

Purchases of available-for-sale securities

     (21,225     (72,156

Sales and maturities of available-for-sale securities

     27,802        91,749   

Proceeds from asset disposals

     10        454   

Investment in equity and cost method investees

     (4,900     (2,913
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (157,670     (5,819
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment of short-term borrowing and long-term debt

     (1,815     (104

Increase in short-term borrowing

     733        651   

Borrowings under Credit Agreement

     562,300        —     

Repayments under Credit Agreement

     (298,500     —     

Payment of debt issuance costs

     (4,929     —     

Repurchase of common shares

     (99,742     (125,829

Dividends paid to common shareholders

     (22,103     (18,142

Exercise of stock options

     3,463        1,888   

Excess tax benefits from stock-based compensation

     552        3   

Other

     (409     (326
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     139,550        (141,859
  

 

 

   

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH

     (4,376     (5,440
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (130,198     (141,342

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     346,116        383,547   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 215,918      $ 242,205   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Income taxes (net of refunds)

   $ 28,099      $ 38,851   

SCHEDULE OF NON-CASH INVESTING ACTIVITY:

    

Accrued capital expenditures included in accounts payable

   $ 3,938      $ 3,445   

See accompanying notes to condensed consolidated financial statements.

 

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THE BABCOCK & WILCOX COMPANY

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:

 

    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, manufacturer’s representatives and joint venture facilities located in more than 30 countries around the globe. We have supplied product and services for more than 300,000 MW of installed electric generating capacity in more than 80 countries.

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

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

 

   

Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy (“DOE”)/National Nuclear Security Administration’s (“NNSA”) Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Through this segment, we own 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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Society of Mechanical Engineers (“ASME”), making them two of only a few North American suppliers of large, heavy-walled nuclear components and vessels. The Euclid facility, which is also ASME N-Stamp certified, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. (“NFS”), one of our wholly owned subsidiaries. Located in Erwin, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.

 

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

 

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

 

    Our mPower segment is designing the B&W 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.

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

 

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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 segment’s 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 customer’s 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:

 

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

Currency translation adjustments

   $ 31,277      $ 38,415   

Net unrealized gain on investments

     207        130   

Net unrealized gain on derivative financial instruments

     438        627   

Unrecognized prior service cost on benefit obligations

     (10,030     (10,824
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 21,892      $ 28,348   
  

 

 

   

 

 

 

 

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

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

     
     2014     2013     2014     2013      

Accumulated Other Comprehensive Income
Component Recognized

   (In thousands)    

Line Item Presented

Realized (losses) gains on derivative financial instruments

   $ (240   $ (621   $ (77   $ (1,152   Revenues
     1,153        (1,117     127        (2,006   Cost of operations
     —          101        10        116      Other-net
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 913        (1,637   $ 60        (3,042   Total before tax
     (234     395        (13     753      Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 679      $ (1,242   $ 47      $ (2,289   Net Income

Amortization of prior service cost on benefit obligations

   $ (509   $ (660   $ (1,018   $ (1,411   Cost of operations
     (86     (50     (171     (100   Selling, general and administrative expenses
  

 

 

   

 

 

   

 

 

   

 

 

   
     (595     (710     (1,189     (1,511   Total before tax
     198        245        395        518      Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (397   $ (465   $ (794   $ (993   Net Income

Realized gain on investments

   $ 7      $ 10      $ 41      $ 724      Other-net
     (3     (3     (15     (3   Provision for Income Taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 4      $ 7      $ 26      $ 721      Net Income
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassification for the period

   $ 286      $ (1,700   $ (721   $ (2,561  
  

 

 

   

 

 

   

 

 

   

 

 

   

Inventories

The components of inventories are as follows:

 

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

Raw materials and supplies

   $ 82,485       $ 85,455   

Work in progress

     9,986         10,872   

Finished goods

     20,500         16,731   
  

 

 

    

 

 

 

Total inventories

   $ 112,971       $ 113,058   
  

 

 

    

 

 

 

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

 

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of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

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

 

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

Balance at December 31, 2013

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

Acquisition of MEGTEC (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

 

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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 DOE’s Funding Program. This cost-sharing award requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50% of qualified expenditures incurred from April 1, 2013 to March 31, 2018. 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

 

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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 entity’s 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&W’s 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 segment’s environmental products and solutions offerings that serves utility markets.

 

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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   

 

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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 segment’s Nuclear Projects business as it had lower margins and higher financial risks. Run-off operations for remaining projects were completed during the quarter ended June 30, 2014. Income (loss) before provision for income taxes for the Nuclear Projects business was $0.0 million and $(0.1) 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 mechanic’s lien in the amount of $37.4 million against the owner’s 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.

 

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

The New Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. Beginning with the quarter following that in which the term loan commitment ends, we are 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 agent’s prime rate) plus a margin ranging from 0.25% to 1.00% per year. The applicable margin for loans varies depending on the credit ratings of the New Credit Agreement. Under the New Credit Agreement, we are charged a commitment fee on the unused portions of the New Credit Agreement, and that fee varies between 0.200% and 0.350% per year depending on the credit ratings of the New Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.250% and 2.000% per year with respect to the amount of each financial letter of credit issued under the New Credit Agreement and a letter of credit fee of between 0.725% and 1.125% per year with respect to the amount of each performance letter of credit issued under the New Credit Agreement, in each case depending on the credit ratings of the New Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the New Credit Agreement. In connection with entering into the New Credit Agreement, we paid upfront fees to the lenders thereunder, and arrangement and other fees to the arrangers and agents of the New Credit Agreement. At 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.

 

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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.

 

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

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

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

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

In September 2011, a jury returned a verdict in the ANI Litigation, finding that the B&W Parties’ settlement of the Hall Litigation for $52.5 million and ARCO’s settlement for $27.5 million were fair and reasonable. Following the verdict, in February 2012, the B&W Parties, ARCO and ANI entered into an agreement in which the parties agreed to the dismissal with prejudice of all remaining claims pending in the ANI Litigation, excluding the B&W

 

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

In July 2013, the Superior Court reversed the judgment of the trial court with instructions to reconsider the issue of the Settlement Claims under a different standard. In August 2013, B&W and ARCO filed a request for appeal of the Superior Court’s decision to the Pennsylvania Supreme Court. On January 24, 2014, the Supreme Court of Pennsylvania granted B&W and ARCO’s request for appeal. The parties’ briefs on the appeal have been filed, 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 customer’s failure to supply fuel complying with the contract specifications. BWCC’s motion for an injunction to prevent further draws on BWCC’s 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.

BWCC’s 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 management’s 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 customer’s 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 customer’s denial of BWCC’s 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, BWCC’s customer filed suit against BWCC in the Superior Court of Coos County, New Hampshire, Case No. 214-2014-CV-14 alleging breach of contract and seeking unspecified amounts (the “New Hampshire suit”). On June 26, 2014, the Ohio suit was dismissed on jurisdictional and forum non conveniens grounds. 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 BWCC’s letters of credit. However, it is premature to predict the outcome of this matter. The litigation could be lengthy, and if BWCC’s customer were to prevail completely or substantially in this matter, the outcome could have a material adverse effect on our financial statements.

 

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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 derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in other – net on our condensed consolidated statements of income. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of other– net in our condensed consolidated statements of income.

We have designated all of our FX forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the 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       $ —     

 

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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.

 

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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.

 

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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   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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.

 

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

 

    our business strategy;

 

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

 

    anticipated levels of demand for our products and services;

 

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

 

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

 

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

 

    expectations regarding the acquisition or divestiture of assets and businesses;

 

    our share repurchase program or other return of capital activities;

 

    our ability to maintain appropriate insurance and indemnities;

 

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

 

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

 

    the effective date and expected impact of accounting pronouncements;

 

    our plans regarding the design, research and development, financing and deployment of the B&W mPower TM reactor; and

 

    anticipated benefits, timing and changes associated with cost reduction and efficiency improvement activities.

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

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

 

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

 

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    the highly competitive nature of our businesses;

 

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

 

    general developments in the industries in which we are involved;

 

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

 

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

 

    changes in our effective tax rate and tax positions;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    volatility and uncertainty of the credit markets;

 

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

 

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

 

    the risks associated with integrating businesses we acquire;

 

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

 

    the aggregated risks retained in our captive insurance subsidiary;

 

    the effects of asserted and unasserted claims;

 

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

 

    changes in, and liabilities relating to, existing or future environmental regulatory matters;

 

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

 

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

 

    adverse outcomes from legal and regulatory proceedings;

 

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

 

    potential violations of the Foreign Corrupt Practices Act;

 

    our ability to successfully compete with current and future competitors;

 

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

 

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

 

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

 

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

 

    potentially inadequate systems of internal controls over financial reporting;

 

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

 

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

 

    the possibilities of natural disasters, war, other armed conflicts or terrorist attacks.

 

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

GENERAL

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

Power Generation Segment

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

 

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

 

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

 

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

 

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

 

    requirements for environmental improvements;

 

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

 

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

 

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

 

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

 

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

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

Nuclear Operations Segment

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

On June 13, 2014, a uranium conversion company filed suit against the Secretary of Energy seeking, among other things, to enjoin the DOE from transferring portions of its excess uranium stockpile to support non-proliferation and other national security initiatives, as well as, fund environmental clean-up work and other initiatives. On July 29, 2014, a motion for preliminary injunction was denied. However, the suit may still be successful in preventing the DOE’s transfer of excess uranium, which could adversely impact results in our Nuclear Operations and Technical Services segments. These activities contributed approximately $11 million and $6 million of operating income to our Nuclear Operations and Technical Services segments during fiscal year 2013.

 

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Technical Services Segment

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

On January 8, 2013, we were notified that our joint venture, Nuclear Production Partners, LLC, was not selected to lead the National Nuclear Security Administration’s (“NNSA”) combined Management and Operating contract for the Y-12 National Security Complex and Pantex Plant. Subsequently, we filed multiple protests with the Government Accountability Office in relation to the selection decision. On February 27, 2014, we received notification that our latest protest was dismissed. As of June 30, 2014, the transition of these facilities to the NNSA’s new contractor is now complete.

Nuclear Energy Segment

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

mPower Segment

This segment is developing the B&W mPower TM reactor and the associated mPower Plant through its majority-owned joint venture, Generation mPower LLC. Its activity is a function of research and development efforts for the B&W mPower TM reactor and the potential orders to be generated from various mPower Plant deployment initiatives. As part of this initiative, we were selected to receive funding and have signed a Cooperative Agreement with the DOE under its Small Modular Reactor Licensing Technical Support Program (“Funding Program”), which is expected to provide financial assistance initially totaling at least $150 million for small modular reactor (“SMR”) design engineering and licensing activities supporting a planned commercial operating date for the first mPower Plant by 2022.

The Funding Program is a cost-sharing award which requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50% of qualified expenditures incurred from April 1, 2013 to March 31, 2018. 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. As a result of our plans to restructure the mPower program, our operating income was negatively impacted by $22.1 million for the six months ended June 30, 2014, consisting of $7.9 million accounted for special charges for restructuring activities as further discussed below and $14.2 million of unrecognized cost-share due to limited additional authorization funding by the DOE under the Funding Program. We intend to work with the DOE to amend the Funding Program to include, among other things, mutually agreeable program milestones for continued funding. 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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Global Competitiveness Initiative and Other Restructuring Activities

We launched the Global Competitiveness Initiative (“GCI”) in the third quarter of 2012 to enhance competitiveness, better position B&W for growth, and improve profitability. We have identified a wide range of cost reduction activities including operational and functional efficiency improvements, organizational design changes, and manufacturing optimization. Once fully executed, these actions are expected to produce at least $75 million in annual savings. The majority of the annual savings are expected to result from efficiency improvements that were completed in 2013. The balance of the cost savings relates to manufacturing initiatives that are expected to be completed by mid-2015. In order to achieve these savings, we expect to incur total restructuring charges (cash and non-cash) of approximately $60 million. We incurred $2.4 million and $20.7 million of costs associated with GCI for the six months ended June 30, 2014 and 2013, respectively.

We continue to focus on structural changes in our operating model to drive significant margin improvement. We are targeting initiatives that we expect to drive margin improvement in our Power Generation segment by 200 to 300 basis points and allow us to achieve a minimum 10% operating margin in our Nuclear Energy segment by the end of 2015. We incurred $9.4 million of costs associated with these initiatives for the six months ended June 30, 2014. We expect these actions to result in additional restructuring charges during the remainder of 2014.

In addition, in the six months ended June 30, 2014, we incurred $7.9 million and $0.4 million of costs associated with the restructuring of our mPower program and our Technical Services segment, respectively.

Critical Accounting Policies and Estimates

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

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

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

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

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

 

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

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

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

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

Accounting for Contracts

As of June 30, 2014, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. A principal risk on fixed-priced contracts is that revenue from the customer is insufficient to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects or provide performance guarantees. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows. In the six months ended June 30, 2014 and 2013, we recognized net changes in estimate related to long-term contracts accounted for on the percentage-of-completion basis, which increased operating income by approximately $21.7 million and $2.9 million, respectively.

 

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RESULTS OF OPERATIONS – THREE AND SIX MONTHS ENDED JUNE 30, 2014 VS. THREE AND SIX MONTHS ENDED JUNE 30, 2013

Selected financial highlights are presented in the table below:

 

    

Three months ended

June 30,

   

Six months ended

June 30,

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

REVENUES:

            

Power Generation

   $ 327,379      $ 471,191      $ (143,812   $ 639,457      $ 932,654      $ (293,197

Nuclear Operations

     293,438        330,986        (37,548     579,652        592,125        (12,473

Technical Services

     26,015        27,432        (1,417     50,470        52,661        (2,191

Nuclear Energy

     44,927        63,185        (18,258     92,707        126,701        (33,994

mPower

     —          333        (333     278        637        (359

Adjustments and Eliminations

     (5,753     (6,991     1,238        (14,541     (13,219     (1,322
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 686,006      $ 886,136      $ (200,130   $ 1,348,023      $ 1,691,559      $ (343,536
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME:

            

Power Generation

   $ 15,215      $ 30,535      $ (15,320   $ 25,757      $ 63,865      $ (38,108

Nuclear Operations

     58,682        65,737        (7,055     118,210        120,461        (2,251

Technical Services

     15,078        15,235        (157     29,867        29,414        453   

Nuclear Energy

     1,548        7,922        (6,374     2,071        10,180        (8,109

mPower

     (31,933     (1,104     (30,829     (58,642     (28,051     (30,591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 58,590      $ 118,325      $ (59,735   $ 117,263      $ 195,869      $ (78,606
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unallocated Corporate

     (6,002     (7,387     1,385        (8,377     (16,295     7,918   

Special Charges for Restructuring Activities

     (17,470     (12,232     (5,238     (20,128     (20,655     527   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 35,118      $ 98,706      $ (63,588   $ 88,758      $ 158,919      $ (70,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Results of Operations

Three Months Ended June 30, 2014 vs. 2013

Consolidated revenues decreased 22.6%, or $200.1 million, to $686.0 million in the three months ended June 30, 2014 compared to $886.1 million for the corresponding period in 2013 due primarily to decreases in revenues from our Power Generation, Nuclear Operations and Nuclear Energy segments totaling $143.8 million, $37.6 million and $18.3 million, respectively.

Consolidated operating income decreased $63.6 million to $35.1 million in the three months ended June 30, 2014 from $98.7 million for the corresponding period in 2013. Operating income for the three months ended June 30, 2014 and 2013 includes special charges for restructuring activities totaling $17.5 million and $12.2 million, respectively. Excluding special charges for restructuring activities, operating income decreased $58.3 million for the three months ended June 30, 2014 compared to 2013. Operating income in our mPower, Power Generation, Nuclear Operations and Nuclear Energy segments declined $30.8 million, $15.3 million, $7.0 million and $6.4 million, respectively. These decreases were partially offset by a $1.4 million decline in unallocated corporate expenses for the 2014 period as compared to 2013.

Six Months Ended June 30, 2014 vs. 2013

Consolidated revenues decreased 20.3%, or $343.6 million, to $1,348.0 million in the six months ended June 30, 2014 compared to $1,691.6 million for the corresponding period in 2013 due primarily to decreases in revenues from our Power Generation, Nuclear Energy and Nuclear Operations segments totaling $293.2 million, $34.0 million and $12.4 million, respectively.

Consolidated operating income decreased $70.1 million to $88.8 million in the six months ended June 30, 2014 from $158.9 million for the corresponding period in 2013. Operating income for the six months ended June 30, 2014 and 2013 includes special charges for restructuring activities totaling $20.1 million and $20.7 million, respectively. Excluding special charges for restructuring activities, operating income decreased $70.7 million for the six months

 

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ended June 30, 2014 compared to 2013. Operating income in our Power Generation, mPower and Nuclear Energy segments declined $38.1 million, $30.5 million and $8.1 million, respectively. These decreases were partially offset by a $7.9 million decline in unallocated corporate expenses for the 2014 period as compared to 2013.

Power Generation

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ 327,379      $ 471,191      $ (143,812   $ 639,457      $ 932,654      $ (293,197

Operating Income

     15,215        30,535        (15,320     25,757        63,865        (38,108

% of Revenues

     4.6     6.5       4.0     6.8  

Three Months Ended June 30, 2014 vs. 2013

Revenues decreased 30.5%, or $143.8 million, to $327.4 million in the three months ended June 30, 2014, compared to $471.2 million in 2013. The decrease was primarily attributable to a $70.5 million decline in our new build environmental equipment business revenues, principally driven by lower levels of engineering, procurement and construction activities as projects related to the previously enacted environmental rules and regulations near completion and uncertainties continue regarding the ultimate outcome of environmental regulations. We also experienced a $27.5 million decrease in revenues from our new build steam generation systems business due to a lower level of activity on our Berlin Station and other renewable energy projects. In addition, we experienced a decrease in revenues of $49.4 million in our aftermarket services business related to fewer service projects caused by a large boiler retrofit and construction project that was completed last year and lower environmental aftermarket revenues.

Operating income decreased $15.3 million to $15.2 million in the three months ended June 30, 2014 compared to $30.5 million in 2013, primarily due to the lower revenues discussed above being partially offset by a lower loss recorded on the Berlin Station project as compared to the prior period. In addition, margins were slightly lower than compared to the prior period as a result of the level of net favorable project close outs. Equity income decreased from our Chinese joint venture due to timing of activity on projects in Vietnam and performance impacts on other projects. These decreases were partially offset by a $1.2 million reduction in selling, general and administrative expenses associated with cost savings from GCI initiatives and a $1.3 million reduction in research and development expenditures.

Six Months Ended June 30, 2014 vs. 2013

Revenues decreased 31.4%, or $293.2 million, to $639.5 million in the six months ended June 30, 2014, compared to $932.7 million in 2013. The decrease was primarily attributable to a $155.5 million decline in revenues from our new build environmental equipment business revenues, principally driven by lower levels of engineering, procurement and construction activities as projects related to the previously enacted environmental rules and regulations near completion and uncertainties continue regarding the ultimate outcome of environmental regulations. We also experienced a $60.3 million decrease in revenues from our new build steam generation systems business due to a lower level of activity on our Berlin Station and other renewable energy projects. In addition, we experienced a decrease in revenues of $79.4 million in our aftermarket services business related to fewer service projects caused by a large boiler retrofit and construction project that was completed last year and lower environmental aftermarket revenues.

Operating income decreased $38.1 million to $25.8 million in the six months ended June 30, 2014 compared to $63.9 million in 2013, primarily due to the lower revenues discussed above being partially offset by a lower loss recorded on the Berlin Station project as compared to the prior period. In addition, equity income decreased from our Chinese joint venture due to timing of activity on projects in Vietnam and performance impacts on other projects. These decreases were partially offset by a $5.5 million reduction in selling, general and administrative expenses associated with cost savings from GCI initiatives and a $3.1 million reduction in research and development expenditures.

 

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Nuclear Operations

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ 293,438      $ 330,986      $ (37,548   $ 579,652      $ 592,125      $ (12,473

Operating Income

     58,682        65,737        (7,055     118,210        120,461        (2,251

% of Revenues

     20.0     19.9       20.3     20.3  

Three Months Ended June 30, 2014 vs. 2013

Revenues decreased by 11.4%, or $37.6 million, to $293.4 million in the three months ended June 30, 2014 compared to $331.0 million in the corresponding period of 2013, primarily attributable to reduced activity related to the manufacturing of nuclear components for U.S. Government programs totaling $34.0 million and lower volume in our naval nuclear fuel and downblending activities totaling $3.6 million. In the three months ended June 30, 2013, we satisfied obligations under a materials purchase contract associated with the manufacturing of nuclear components for our U.S. Government programs that led to higher revenues in the prior period.

Operating income decreased $7.0 million to $58.7 million in the three months ended June 30, 2014 compared to $65.7 million in the corresponding period of 2013, primarily due to lower revenues associated with the manufacturing of nuclear components for U.S. Government programs discussed above.

Six Months Ended June 30, 2014 vs. 2013

Revenues decreased by 2.1%, or $12.4 million, to $579.7 million in the six months ended June 30, 2014 compared to $592.1 million in the corresponding period of 2013, primarily attributable to reduced activity related to the manufacturing of nuclear components for U.S. Government programs totaling $12.9 million. In the six months ended June 30, 2013, we satisfied obligations under a materials purchase contract associated with the manufacturing of nuclear components for our U.S. Government programs that led to higher revenues in the prior period.

Operating income decreased $2.3 million to $118.2 million in the six months ended June 30, 2014 compared to $120.5 million in the corresponding period of 2013, primarily due to lower revenues associated with the manufacturing of nuclear components for U.S. Government programs discussed above.

Technical Services

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014      2013      $ Change     2014      2013      $ Change  

Revenues

   $ 26,015       $ 27,432       $ (1,417   $ 50,470       $ 52,661       $ (2,191

Operating Income

     15,078         15,235         (157     29,867         29,414         453   

Three Months Ended June 30, 2014 vs. 2013

Revenues decreased 5.1%, or $1.4 million, to $26.0 million in the three months ended June 30, 2014 compared to $27.4 million for the corresponding period of 2013, primarily attributable to a decrease in specialty manufacturing associated with the American Centrifuge Program.

Operating income totaled $15.1 million in the three months ended June 30, 2014, which was essentially unchanged from the corresponding period of 2013.

Six Months Ended June 30, 2014 vs. 2013

Revenues decreased 4.2%, or $2.2 million, to $50.5 million in the six months ended June 30, 2014 compared to $52.7 million for the corresponding period of 2013, primarily attributable to a decrease in specialty manufacturing associated with the American Centrifuge Program.

 

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Operating income increased $0.5 million to $29.9 million in the six months ended June 30, 2014 compared to $29.4 million in the corresponding period of 2013. This increase is primarily attributable to costs incurred in the prior period related to restructuring of a contract, partially offset by higher selling, general, and administrative expenses compared to the corresponding period of 2013 due to timing of new proposal activity.

Nuclear Energy

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ 44,927      $ 63,185      $ (18,258   $ 92,707      $ 126,701      $ (33,994

Operating Income

     1,548        7,922        (6,374     2,071        10,180        (8,109

% of Revenues

     3.4     12.5       2.2     8.0  

Three Months Ended June 30, 2014 vs. 2013

Revenues decreased 29.0%, or $18.3 million, to $44.9 million in the three months ended June 30, 2014 compared to $63.2 million in the corresponding period of 2013. This decrease was primarily attributable to the completion of two replacement steam generator contracts that were ongoing in the prior year period. We also experienced a $5.9 million decrease in revenues from our nuclear services business due to the completion of certain maintenance and service projects that were ongoing in the corresponding period in 2013.

Operating income decreased $6.4 million to $1.5 million in the three months ended June 30, 2014 compared to $7.9 million in the corresponding period of 2013, primarily attributable to the decrease in revenues noted above. In addition, during the three months ended June 30, 2013, we recognized a reduction in our warranty accrual rate as a result of favorable claims experience resulting in $2.1 million of operating income.

Six Months Ended June 30, 2014 vs. 2013

Revenues decreased 26.8%, or $34.0 million, to $92.7 million in the six months ended June 30, 2014 compared to $126.7 million in the corresponding period of 2013. This decrease is primarily attributable to a $19.3 million decrease in our nuclear services business due to the completion of certain maintenance and service projects that were ongoing in prior period. In addition, we also experienced a decrease in revenues from our nuclear equipment business due to the completion of two replacement steam generator contracts that were ongoing in the prior year period.

Operating income decreased $8.1 million to $2.1 million in the six months ended June 30, 2014 compared to $10.2 million in the corresponding period of 2013, primarily attributable to the decrease in revenues noted above. In addition, during the six months ended June 30, 2013, we recognized a reduction in our warranty accrual rate as a result of favorable claims experience resulting in $2.1 million of operating income. This decrease was partially offset by $3.9 million of reduced selling, general and administrative expenses associated with cost savings from GCI initiatives.

mPower

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Revenues

   $ —        $ 333      $ (333   $ 278      $ 637      $ (359

Operating Income

     (31,933     (1,104     (30,829     (58,642     (28,051     (30,591

Three Months Ended June 30, 2014 vs. 2013

Operating income decreased $30.8 million to a loss of $31.9 million in the three months ended June 30, 2014 compared to a loss of $1.1 million in the corresponding period of 2013, primarily due to a decrease in the recognition of the cost-sharing award from the DOE under the Cooperative Agreement totaling $35.0 million. We recognized $37.8 million related to the cost-sharing award in the three months ended June 30, 2013, of which $21.5 million related to cost reimbursement for the pre-award period. Research and development activities related to the continued development of the B&W mPower™ reactor decreased by $2.7 million.

 

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Six Months Ended June 30, 2014 vs. 2013

Operating income decreased $30.5 million to a loss of $58.6 million in the six months ended June 30, 2014 compared to a loss of $28.1 million in the corresponding period of 2013, primarily due to a decrease in the recognition of the cost-sharing award from the DOE under the Cooperative Agreement totaling $18.0 million. We recognized $37.8 million related to the cost-sharing award in the six months ended June 30, 2013, of which $9.7 million related to cost reimbursement for the 2012 pre-award period. In addition, research and development activities related to the continued development of the B&W mPower™ reactor increased by $12.3 million.

Unallocated Corporate

Unallocated corporate expenses decreased $1.4 million to $6.0 million for the three months ended June 30, 2014, as compared to $7.4 million for the corresponding period in 2013, mainly related to the timing of healthcare cost allocations.

Unallocated corporate expenses decreased $7.9 million to $8.4 million for the six months ended June 30, 2014, as compared to $16.3 million for the corresponding period in 2013. This decrease was attributable to the timing of healthcare cost allocations and reduced information technology costs totaling $2.5 million largely related to costs associated with cyber security upgrades incurred in the prior year period.

Special Charges for Restructuring Activities

Operating income for the six months ended June 30, 2014 includes special charges for restructuring activities totaling $2.4 million of GCI charges related to facility consolidation and employee termination benefits; $7.9 million in employee termination benefits, facility consolidation and consulting and administrative costs related to the restructuring of our mPower program; $9.4 million in employee termination benefits, facility consolidation and consulting and administrative costs related to the business optimization project in our Power Generation and Nuclear Energy segments; and $0.4 million in employee termination benefits for the restructuring of our Technical Services segment. During the six months ended June 30, 2013, we recorded GCI charges of $20.7 million related to employee termination benefits and consulting and administrative costs.

Provision for Income Taxes

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2014     2013     $ Change     2014     2013     $ Change  

Income from Continuing Operations before Provision for Income Taxes

   $ 34,967      $ 99,245      $ (64,278   $ 89,449      $ 160,378      $ (70,929

Income Tax Provision

     11,475        29,544        (18,069     24,803        45,801        (20,998

Effective Tax Rate

     32.8     29.8       27.7     28.6  

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 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 will allow 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.

 

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Backlog

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

 

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

Power Generation

   $ 2,215       $ 2,072   

Nuclear Operations

     2,579         2,369   

Technical Services

     12         5   

Nuclear Energy

     192         142   

mPower

     1         2   
  

 

 

    

 

 

 

Total Backlog

   $ 4,999       $ 4,590   
  

 

 

    

 

 

 

We recorded new bookings in our Nuclear Operations segment totaling $784 million for the six months ended June 30, 2014, contributing to the $210 million increase in our Nuclear Operations backlog since December 31, 2013. Major new awards from the U.S. Government are typically received during the fourth quarter of each year following congressional approval of the budget for the government’s next fiscal year, which starts October 1. Due to events associated with the government shutdown and delayed budget approvals, awards anticipated in the fourth quarter of 2013 were delayed until the first quarter of 2014.

We recorded new bookings in our Power Generation segment totaling $691 million for the six months ended June 30, 2014, contributing to the $143 million increase in our Power Generation backlog since December 31, 2013. The increase in backlog of the Power Generation segment was primarily driven by increased boiler bookings in our new build steam generation business. In addition, the acquisition of MEGTEC resulted in increased backlog totaling $83 million.

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

 

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

Power Generation

   $ 605       $ 651       $ 959       $ 2,215   

Nuclear Operations

     586         888         1,105         2,579   

Technical Services

     12         —           —           12   

Nuclear Energy

     51         41         100         192   

mPower

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Backlog

   $ 1,255       $ 1,580       $ 2,164       $ 4,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014, Power Generation backlog with the U.S. Government was $22.6 million, all of which was fully funded.

At June 30, 2014, Nuclear Operations backlog with the U.S. Government was $2.4 billion, of which $225.6 million had not yet been funded.

At June 30, 2014, Technical Services backlog with the U.S. Government was $12.2 million, all of which was fully funded.

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

 

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Liquidity and Capital Resources

Credit Facility

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

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

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

The New Credit Agreement contains financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt and mergers. At 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 agent’s prime rate) plus a margin ranging from 0.25% to 1.00% per year. The applicable margin for loans varies depending on the credit ratings of the New Credit Agreement. Under the New Credit Agreement, we are charged a commitment fee on the unused portions of the New Credit Agreement, and that fee varies between 0.200% and 0.350% per year depending on the credit ratings of the New Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.250% and 2.000% per year with respect to the amount of each financial letter of credit issued under the New Credit Agreement and a letter of credit fee of between 0.725% and 1.125% per year with respect to the amount of each performance letter of credit issued under the New Credit Agreement, in each case depending on the credit ratings of the New Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the New Credit Agreement. In connection with entering into the New Credit Agreement, we paid upfront fees to the lenders thereunder, and arrangement and other fees to the arrangers and agents of the New Credit Agreement. At 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.

 

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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.

Other Arrangements

Certain subsidiaries within our Power Generation segment have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of June 30, 2014 was $124.7 million.

We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety’s discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of June 30, 2014, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $396.0 million.

Long-term Benefit Obligations

Our unfunded pension and postretirement benefit obligations totaled $432.6 million at June 30, 2014. These long-term liabilities are expected to require use of Company resources to satisfy our future funding obligations. For the six months ended June 30, 2014, we made contributions to our pension and postretirement benefit plans totaling $27.0 million. We expect to make contributions to these plans totaling $37.6 million for the remainder of 2014.

Other

In aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by $143.0 million to $267.0 million at June 30, 2014 from $410.0 million at December 31, 2013 primarily due to the items discussed below.

Our working capital increased by approximately $123.8 million to $634.0 million at June 30, 2014 from $510.2 million at December 31, 2013, attributable primarily to an increase in net contracts in progress and advance billings on contracts due primarily to lower net advance billings associated with the decline in contract activity in our Power Generation segment. We also experienced increased working capital associated with account payable movement caused by the adverse timing of payments of contract costs in relation to the collection of billings on certain contracts. In addition, a larger portion of our pension liability is reported as a long-term obligation this period.

Our net cash used in operations was $107.7 million in the six months ended June 30, 2014, compared to cash provided by operations of $11.8 million for the six months ended June 30, 2013. This increase in cash used was primarily attributable to a reduction in accounts payable as discussed above.

Our net cash used in investing activities increased by $151.9 million to $157.7 million in the six months ended June 30, 2014 from $5.8 million in the six months ended June 30, 2013. This increase in net cash used in investing activities was primarily attributable to the acquisition of MEGTEC.

Our net cash provided by financing activities was $139.6 million in the six months ended June 30, 2014, compared to cash used in financing activities of $141.9 million for the six months ended June 30, 2013. This increase in net cash provided by financing activities was primarily attributable to an increase in borrowings on our credit facility, primarily to fund the acquisition of MEGTEC, common share repurchase activity and working capital needs.

 

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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 accounts, $2.6 million of which was held for future decommissioning of facilities (which we include in other assets on our condensed consolidated balance sheets) and $36.4 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).

At June 30, 2014, we had investments with a fair value of $8.8 million. Our investment portfolio consists primarily of investments in highly liquid money market instruments. 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 income.

Foreign Operations

Approximately $186.7 million, or 86%, of our total unrestricted cash and cash equivalents at June 30, 2014 is related to foreign operations. In general, these resources are not available to fund our U.S. operations unless the funds are repatriated to the U.S., which would expose us to taxes we presently have not accrued in our results of operations. We presently have no plans to repatriate these funds to the U.S. as the liquidity generated by our U.S. operations is sufficient to meet the cash requirements of our U.S. operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 6 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.

Item 1A. Risk Factors

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

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

In November 2012, we announced that our Board of Directors authorized a share repurchase program. The following table provides information on our purchases of equity securities during the quarter ended June 30, 2014. For the six months ended June 30, 2014, we repurchased 3.1 million shares at a cost of $99.7 million. Any shares purchased that were not part of a publicly announced plan or program are related to repurchases of common stock pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.

 

Period

   Total number
of shares
purchased
(1)
     Average price
paid
per share
     Total number of
shares purchased as
part of publicly
announced plans or
programs
     Approximate dollar
value of shares that
may yet be
purchased under the
plans or programs
(in millions)
(2)
 

April 1, 2014 – April 30, 2014

     182,217       $ 33.47         179,400       $ 474.7   

May 1 2014 – May 31, 2014

     696,094       $ 32.25         694,000       $ 452.3   

June 1, 2014 – June 30, 2014

     1,717,766       $ 32.46         1,714,500       $ 396.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,596,077       $ 32.47         2,587,900      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 2,817, 2,094, and 3,266 shares repurchased during April, May and June, respectively, pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.
(2) On November 7, 2012, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million in the open market during a two-year period ending on November 5, 2014. On May 7, 2013, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million. On February 26, 2014, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million. The May 2013 and February 2014 authorizations are in addition to the initial $250 million share repurchase amount authorized in November 2012. On December 9, 2013, we completed the repurchase of shares using our initial $250 million authorization. We may repurchase shares in the open market using the additional repurchase amounts authorized in May 2013 and February 2014 during a two-year period that expires February 25, 2016.

Item 4. Mine Safety Disclosures

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

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

 

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Table of Contents

Item 6. Exhibits

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

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

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

10.1* - Second Amended and Restated Credit Agreement, dated as of June 24, 2014, entered into by and among The Babcock & Wilcox Company, certain lenders and letter of credit issuers executing the signature pages thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated June 26, 2014 (File No. 1-34658)).

10.2* - Second Amended and Restated Pledge and Security Agreement, dated as of June 24, 2014, entered into by and among The Babcock & Wilcox Company and certain of its subsidiaries in favor of Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated June 26, 2014 (File No. 1-34658)).

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

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

Exhibit 32.1 - Section 1350 certification of Chief Executive Officer.

Exhibit 32.2 - Section 1350 certification of Chief Financial Officer.

Exhibit 95 - Mine Safety Disclosure

101.INS - XBRL Instance Document

101.SCH - XBRL Taxonomy Extension Schema Document

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

 

* Incorporated by reference to the filing indicated.

 

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SIGNATURES

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

 

  THE BABCOCK & WILCOX COMPANY
 

/s/ Anthony S. Colatrella

By:   Anthony S. Colatrella
 

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and Duly Authorized Representative)

 

/s/ David S. Black

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

August 6, 2014

 

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EXHIBIT INDEX

 

Exhibit

Number

   Description
    2.1*    Master Separation Agreement, dated as of July 2, 2010, between McDermott International, Inc. and The Babcock & Wilcox Company (incorporated by reference to Exhibit 2.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).
    3.1*    Restated Certificate of Incorporation of The Babcock & Wilcox Company (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-34658)).
    3.2*    Amended and Restated Bylaws of The Babcock & Wilcox Company effective September 9, 2013 (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Current Report on Form 8-K dated September 11, 2013 (File No. 1-34658)).
  10.1*    Second Amended and Restated Credit Agreement, dated as of June 24, 2014, entered into by and among The Babcock & Wilcox Company, certain lenders and letter of credit issuers executing the signature pages thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated June 26, 2014 (File No. 1-34658)).
  10.2*    Second Amended and Restated Pledge and Security Agreement, dated as of June 24, 2014, entered into by and among The Babcock & Wilcox Company and certain of its subsidiaries in favor of Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated June 26, 2014 (File No. 1-34658)).
  31.1    Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
  31.2    Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.
  32.1    Section 1350 certification of Chief Executive Officer.
  32.2    Section 1350 certification of Chief Financial Officer.
  95    Mine Safety Disclosure
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Incorporated by reference to the filing indicated.