UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2013
OR
For the transition period from to
Commission File No. 001-34658
THE BABCOCK & WILCOX COMPANY
(Exact name of registrant as specified in its charter)
(State of Incorporation
or Organization)
(I.R.S. Employer
Identification No.)
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrant’s common stock outstanding at October 31, 2013 was 110,797,781.
I N D E X – F O R M 1 0 – Q
PART I – FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets September 30, 2013 and December 31, 2012 (Unaudited)
Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
Condensed Consolidated Statements of Stockholders’ Equity Nine Months Ended September 30, 2013 and 2012 (Unaudited)
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2013 and 2012 (Unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Item 4 – Controls and Procedures
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 4 – Mine Safety Disclosures
Item 6 – Exhibits
SIGNATURES
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PART I
FINANCIAL INFORMATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash and cash equivalents
Investments
Accounts receivable – trade, net
Accounts receivable – other
Contracts in progress
Inventories
Deferred income taxes
Other current assets
Total Current Assets
Property, Plant and Equipment
Less accumulated depreciation
Net Property, Plant and Equipment
Goodwill
Deferred Income Taxes
Investments in Unconsolidated Affiliates
Intangible Assets
Other Assets
TOTAL
See accompanying notes to condensed consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable and current maturities of long-term debt
Accounts payable
Accrued employee benefits
Accrued liabilities – other
Advance billings on contracts
Accrued warranty expense
Income taxes payable
Total Current Liabilities
Long-Term Debt
Accumulated Postretirement Benefit Obligation
Environmental Liabilities
Pension Liability
Other Liabilities
Commitments and Contingencies (Note 5)
Stockholders’ Equity:
Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 120,361,748 and 119,608,026 shares at September 30, 2013 and December 31, 2012, respectively
Preferred stock, par value $0.01 per share, authorized 75,000,000 shares; No shares issued
Capital in excess of par value
Retained earnings
Treasury stock at cost, 9,542,087 and 4,372,143 shares at September 30, 2013 and December 31, 2012, respectively
Accumulated other comprehensive income
Stockholders’ Equity – The Babcock & Wilcox Company
Noncontrolling interest
Total Stockholders’ Equity
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Revenues
Costs and Expenses:
Cost of operations
Research and development costs
Losses on asset disposals and impairments – net
Selling, general and administrative expenses
Special charges for restructuring activities
Total Costs and Expenses
Equity in Income of Investees
Operating Income
Other Income (Expense):
Interest income
Interest expense
Other – net
Total Other Income (Expense)
Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
Net Loss Attributable to Noncontrolling Interest
Net Income Attributable to The Babcock & Wilcox Company
Earnings per Common Share:
Basic:
Diluted:
Shares used in the computation of earnings per share (Note 10):
Basic
Diluted
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Other Comprehensive Income:
Currency translation adjustments
Derivative financial instruments:
Unrealized gains (losses) arising during the period, net of tax benefit (provision) of $(338), $(1,618), $1,004, and $(874), respectively
Reclassification adjustment for (gains) losses included in net income, net of tax provision (benefit) of $158, $798, $(671), and $730, respectively
Amortization of benefit plan costs, net of tax benefit of $(264), $(332), $(782), and $(855), respectively
Investments:
Unrealized gains arising during the period, net of tax provision of $(42), $0, $(48), and $0, respectively
Reclassification adjustment for gains included in net income, net of tax provision of $2, $0, $5, and $0, respectively
Other Comprehensive Income (Loss)
Total Comprehensive Income
Comprehensive Loss Attributable to Noncontrolling Interest
Comprehensive Income Attributable to The Babcock & Wilcox Company
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balance December 31, 2012
Net income
Dividends declared ($0.24 per share)
Amortization of benefit plan costs
Gain on investments
Translation adjustments
Gain on derivatives
Exercise of stock options
Contributions to thrift plan
Shares placed in treasury
Stock-based compensation charges
Contribution of in-kind services
Distributions to noncontrolling interests
Balance September 30, 2013 (unaudited)
Balance December 31, 2011
Balance September 30, 2012 (unaudited)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Non-cash items included in net income:
Depreciation and amortization
Income of investees, net of dividends
Losses on asset disposals and impairments
Impairment of USEC investment
Recognition of uncertain tax positions
In-kind research and development costs
Amortization of pension and postretirement costs
Stock-based compensation expense
Excess tax benefits from stock-based compensation
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Contracts in progress and advance billings on contracts
Current and deferred income taxes
Accrued and other current liabilities
Pension liability, accumulated postretirement benefit obligation and accrued employee benefits
Other, net
NET CASH USED IN OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in restricted cash and cash equivalents
Purchases of property, plant and equipment
Proceeds from sale of unconsolidated affiliate
Purchase of intangible assets
Purchases of available-for-sale securities
Sales and maturities of available-for-sale securities
Investment in equity and cost method investees
Proceeds from asset disposals
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of short-term borrowing and long-term debt
Increase in short-term borrowing
Payment of debt issuance costs
Repurchase of common shares
Dividends paid to common shareholders
Other
NET CASH USED IN FINANCING ACTIVITIES
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes (net of refunds)
SCHEDULE OF NONCASH INVESTING ACTIVITY:
Accrued capital expenditures included in accounts payable
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
(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 and combined financial statements and notes in our annual report on Form 10-K for the year ended December 31, 2012 (our “2012 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 have reclassified certain amounts previously reported to conform to the presentation at September 30, 2013 and for the three and nine months ended September 30, 2013. 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 at September 30, 2013 reflect changes we made during the first quarter of 2013 in the manner in which our segment operating information is reported for purposes of assessing operating performance and allocating resources. Prior to 2013, we reported four segments: Power Generation, Nuclear Operations, Technical Services and Nuclear Energy. Our small modular nuclear reactor business, previously included in our Nuclear Energy segment, is now being reported as a separate segment, mPower. The change in our reportable segments had no impact on our previously reported results of operations, financial condition or cash flows. We have applied the change in reportable segments to previously reported historical financial information and disclosures included in this report. Our reportable segments are further described as follows:
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
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and operate manufacturing facilities located in Lynchburg, Virginia; Mount Vernon, Indiana; Euclid, Ohio; Barberton, Ohio; and Erwin, Tennessee. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components. These two locations are N-Stamp certified by the American Society of Mechanical Engineers (“ASME”), making them two of only a few North American suppliers of large, heavy-walled nuclear components and vessels. The Euclid facility, which is also ASME N-Stamp certified, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. (“NFS”), one of our wholly owned subsidiaries. Located in Erwin, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.
See Note 9 for further information regarding our segments.
Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated and combined financial statements and the related footnotes included in our 2012 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 progress and resulting periodic allocation of income. We include revenues and related costs so recorded, plus
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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 nine months ended September 30, 2013, we recorded contract losses totaling $30.2 million for additional estimated costs to complete a project in our Power Generation segment. These losses are in addition to contract losses recorded for this project during 2012. In May 2012, we entered into an agreement with a customer of a Nuclear Energy project to settle contract claims resulting in recognition of revenues totaling approximately $18.4 million for the nine months ended September 30, 2012.
Some of our contracts contain certain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under those provisions. These contracts define the conditions and timing under which our customers may make claims against us for liquidated damages. In the majority of cases in which we have had potential exposure for liquidated damages, such damages ultimately were determined not to be caused by our actions or were not otherwise asserted by our customers. Accordingly, we do not accrue liabilities for liquidated damages unless probable and estimable. As of September 30, 2013, we had not accrued for approximately $3.0 million of potential liquidated damages that are reasonably possible to be asserted based on our current expectations of the time to complete a certain project.
Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity are as follows:
Net unrealized gain on investments
Net unrealized gain on derivative financial instruments
Unrecognized prior service cost on benefit obligations
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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
September 30,
Nine Months Ended
Accumulated Other Comprehensive Income
Component Recognized
Line Item Presented
Realized (losses) gains on derivative financial instruments
Amortization of prior service cost on benefit obligations
Realized gain on investments
Total reclassification for the period
The components of inventories are as follows:
Raw materials and supplies
Work in progress
Finished goods
Total inventories
Restricted Cash and Cash Equivalents
At September 30, 2013, we had restricted cash and cash equivalents totaling approximately $49.3 million, $3.3 million of which was held in restricted foreign accounts, $3.0 million of which was held for future decommissioning of facilities (which we include in other assets on our condensed consolidated balance sheets), $43.0 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).
Warranty Expense
We accrue estimated expense included in cost of operations on our condensed consolidated statements of income to satisfy the expected cost of contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions when 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.
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The following summarizes the changes in the carrying amount of our accrued warranty expense:
Balance at beginning of period
Additions
Expirations and other changes
Payments
Currency translation
Balance at end of period
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 evaluations for translation into practical applications. We charge costs of research and development unrelated to specific contracts as incurred. Substantially all of these costs are in our Power Generation and mPower segments, the majority of which are related to the development of our B&W mPowerTM reactor and the associated mPower Plant.
During the three and nine months ended September 30, 2013, we recognized $3.9 million and $11.3 million, respectively, of non-cash in-kind research and development costs as compared to $4.8 million and $13.5 million during the three and nine months ended September 30, 2012. These costs are related to services contributed by our minority partner to GmP, our majority-owned subsidiary formed in 2011 to oversee the program to develop the mPower Plant based on B&W mPowerTM technology.
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 during the period from April 1, 2013 to March 31, 2018. The DOE has authorized $99.3 million of funding for this award program as of September 30, 2013. The remaining anticipated DOE funding has not yet been authorized and is subject to Congressional appropriations. The Cooperative Agreement also provides for reimbursement of pre-award costs incurred from October 1, 2012 to March 31, 2013. During the three and nine months ended September 30, 2013, we recognized $16.4 million and $54.2 million, respectively, associated with the funding award, including $21.5 million during the nine months ended September 30, 2013 of pre-award cost reimbursement, as a reduction of research and development costs on our condensed consolidated statements of income.
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 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 September 30, 2013 was approximately 30.0% as compared to 12.8% for the three months ended September 30, 2012. The effective tax rate for the three month period in 2013 was higher than the effective tax rate for the comparable period in 2012 primarily due to the 2012 recognition of $25.3 million of previously unrecognized tax benefits for which the statute of limitations had expired and a $27 million impairment charge for which no associated tax benefit was recognized.
Our effective tax rate for the nine months ended September 30, 2013 was approximately 29.0% as compared to 29.2% for the nine months ended September 30, 2012. The effective tax rate for the nine month period in 2013 included certain tax benefits associated with 2012 R&D tax credits and foreign income exclusions related to the
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provisions of the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013. The effective tax rate in 2012 was impacted by the recognition of $25.3 million of previously unrecognized tax benefits related to the expiration of the statute of limitations in certain jurisdictions and a $27 million impairment charge for which no associated tax benefit was recognized.
As of September 30, 2013, we had gross unrecognized tax benefits of $5.1 million, which, if recognized, would impact our effective tax rate from continuing operations. We believe that within the next twelve months, it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately $1.0 million.
There were no significant penalties recorded during the nine months ended September 30, 2013.
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board issued an update to the topic Income Taxes. This update relates to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This update will be effective for us in 2014. We are currently evaluating the impact that the adoption of this update will have on our consolidated financial statements.
Other than as described above, there have been no material changes to the recent pronouncements discussed in our 2012 10-K.
NOTE 2 – BUSINESS ACQUISITIONS AND INVESTMENTS
USEC Inc. Investment
In May 2010, our subsidiary Babcock & Wilcox Investment Company (“BWICO”) entered into an agreement with Toshiba Corporation (“Toshiba”), which was subsequently assigned to one of its subsidiaries, and USEC Inc. (“USEC”) to make a strategic investment in USEC totaling $200 million payable over three phases. In September 2010, following the satisfaction of certain conditions, including the availability to USEC’s American Centrifuge program of at least $2 billion in uncommitted funds under the DOE’s Loan Guarantee Program for front-end nuclear fuel facilities and the establishment of a joint venture between us and USEC for supply by the joint venture of centrifuges and related equipment for the American Centrifuge program, we made a $37.5 million investment in USEC as part of a definitive agreement for us to make a total $100 million strategic investment in USEC.
In connection with our investment, we received 37,500 shares of USEC Series B-1 12.75% Convertible Preferred Stock and Warrants to purchase 3,125,000 shares of USEC Class B Common Stock at an exercise price of $7.50 per share, which are exercisable between January 1, 2015 and December 31, 2016, and a seat on USEC’s board of directors. On July 1, 2013, USEC completed a 1-for-25 reverse stock split of its common stock, resulting in a decrease of the shares to be purchased under the Warrants to 125,000 at an adjusted exercise price of $187.50 per share.
In 2011, we entered into a standstill agreement with USEC and Toshiba when it became apparent that USEC would not be able to satisfy the closing conditions applicable to the second phase of the strategic investment. Pursuant to the standstill agreement, each party agreed not to exercise its right to terminate the strategic investment agreement for a limited standstill period, as subsequently extended. USEC has been unable to satisfy the closing conditions to the second and third phases of the strategic investment and the limited standstill period, as extended, has expired. Currently, BWICO, Toshiba and USEC each have the right to terminate their obligations under the original strategic investment agreement.
On June 12, 2012, USEC entered into a Cooperative Agreement with the DOE to provide funding for a cost-share research, development and demonstration (“RD&D”) program to enhance the technical and financial readiness of centrifuge technology for commercialization. The Cooperative Agreement provides for 80% DOE and 20% USEC cost sharing for work performed during the period from June 1, 2012 through December 31, 2013.
On August 1, 2012, USEC filed its quarterly report for the period ended June 30, 2012 on Form 10-Q with the Securities and Exchange Commission. This report contained several updated risk factors (along with other disclosures) concerning operational and structural issues facing USEC including, but not limited to, the future operations of USEC’s Paducah Gaseous Diffusion Plant, achievement of milestones under the RD&D program discussed above, approved funding for the RD&D program, achievement of milestones under a 2002 DOE-USEC
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Agreement to develop, demonstrate and deploy the American Centrifuge technology and possible failure to maintain compliance with listing requirements of the New York Stock Exchange, which could result in a delisting of USEC’s common stock (which could require USEC to repurchase its convertible notes for cash and trigger a default under its credit facility). In addition, on August 15, 2012 Standard & Poor’s lowered its ratings on USEC, including the corporate credit rating to CCC from CCC+ along with a negative outlook. Standard & Poor’s also lowered its issue-level rating on USEC’s senior convertible notes due October 2014 to CC from CCC-. In the third quarter of 2012, based on the facts and circumstances disclosed above, we decided that a fair value determination of our cost-method investment in USEC Preferred Stock was warranted. We determined the fair value of our investment in USEC Preferred Stock, with the assistance of a third party valuation firm, resulting in a $27.0 million impairment charge recognized in the third quarter of 2012. This impairment resulted in a remaining book value of our preferred stock investment totaling $19.1 million.
On March 18, 2013 USEC filed its annual report for the period ended December 31, 2012 on Form 10-K with the Securities and Exchange Commission. This report disclosed the recognition of a $1.1 billion impairment charge resulting in a stockholders’ deficit position at December 31, 2012, and USEC further disclosed that it has engaged with advisors and certain stakeholders on alternatives for a possible restructuring of its balance sheet. These events resulted in USEC’s independent registered public accounting firm including an explanatory paragraph in its report stating that these factors raise substantial doubt about USEC’s ability to continue as a going concern. We continue to engage in restructuring discussions with USEC and evaluate the impact of these developments on our remaining investment in USEC Preferred Stock as new facts become available. We continue to manufacture components for and provide technical support services to the American Centrifuge program.
NOTE 3 – GLOBAL COMPETITIVENESS INITIATIVE
In the third quarter of 2012, we announced the Global Competitiveness Initiative (“GCI”) to enhance competitiveness, better position B&W for growth, and improve profitability. In conjunction with GCI, during the nine months ended September 30, 2013, we reduced our workforce and initiated other actions, resulting in $15.8 million of expenses related to employee termination benefits, $8.1 million of expenses related to consulting and GCI administrative costs, and $1.6 million of expenses related to facility consolidation charges.
The following summarizes the changes in our GCI restructuring liability for the nine months ended September 30, 2013 and September 30, 2012:
Nine months ended
Liability balance at the beginning of the period
Special charges for restructuring activities(1)
Liability balance at the end of the period
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NOTE 4 – PENSION PLANS AND POSTRETIREMENT BENEFITS
In the fourth quarter of 2012, we elected to change our accounting method for recognizing actuarial gains and losses for our pension and other postretirement benefit plans. In connection with our accounting change we have revised previously reported amounts to conform to our current method of accounting.
Components of net periodic benefit cost included in net income are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Net periodic benefit cost
NOTE 5 – COMMITMENTS AND CONTINGENCIES
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”), B&W 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 fourteen lawsuits pending in the U.S. District Court for the Western District of Pennsylvania against the B&W Parties and ARCO. Following the dismissal of a number of claims in June 2012, 10 additional primary claims were filed on February 4, 2013, followed by the filing of 2 additional primary claims on May 17, 2013 and 8 additional primary claims on October 21, 2013. In total, the suits presently involve approximately 95 primary claimants alleging, 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 closed except with regard to the most recent 8 primary claims. 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
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Litigation in 2009 for $52.5 million, settling approximately 250 personal injury and wrongful death claims, as well as approximately 125 property damage claims, alleging damages as a result of alleged releases involving the facilities. ARCO and the B&W Parties retained their insurance rights against ANI in their respective settlements; however, under a related settlement regarding ARCO’s indemnification of B&W PGG relating to the two facilities, ARCO assigned to the B&W Parties 58.33% of the total of all ARCO’s proceeds/amounts recovered against ANI on account of the Hall Litigation.
The B&W Parties sought recovery from ANI for amounts paid by the B&W Parties to settle the Hall Litigation, along with unreimbursed attorney fees, allocated amounts assigned by ARCO to the B&W Parties, and applicable interest based upon ANI’s breach of contract and bad faith conduct in the matter of The Babcock & Wilcox Company et al. v. American Nuclear Insurers, et al. (the “ANI Litigation”). ARCO also sought recovery against ANI in the ANI Litigation, which has been pending before the Court of Common Pleas of Allegheny County, Pennsylvania.
In September 2011, a jury returned a verdict in the ANI Litigation, finding that the B&W Parties’ settlement of the Hall Litigation for $52.5 million and ARCO’s settlement for $27.5 million were fair and reasonable. Following the verdict, in February 2012, the B&W Parties, ARCO and ANI entered into an agreement in which the parties agreed to the dismissal with prejudice of all remaining claims pending in the ANI Litigation, excluding the B&W Parties’ and ARCO’s claims seeking reimbursement from ANI for the $52.5 million and $27.5 million settlements (plus interest) (the “Settlement Claims”). By agreement, ANI also waived: (1) any and all rights to appeal the September 2011 jury verdict on the basis of the trial court’s evidentiary rulings; and (2) any defenses and arguments of any kind except ANI’s position that it was not required to reimburse the B&W Parties’ and ARCO for their settlements under the provisions of the ANI policies. In February 2012, the Court granted the parties’ proposed order implementing their agreement and entered final judgment in favor of the B&W Parties and ARCO on the Settlement Claims. As part of the final order and judgment, the Court ruled that the B&W Parties and ARCO are entitled to pre-judgment interest on their $52.5 million and $27.5 million settlements, in the amounts of approximately $8.8 million and $6.2 million, respectively. In addition, post-verdict interest from the date of the jury verdict was awarded at 6%. In March 2012, ANI filed a notice of appeal as to the final judgment and a supersedeas appeal bond in the amount of 120% of the total final judgment amount. The parties filed their respective briefs with the Superior Court and oral arguments were held October 31, 2012.
In July 2013, the Superior Court reversed the judgment of the trial court with instructions to reconsider the issue of the Settlement Claims under a different standard. In August 2013, B&W and ARCO filed a request for appeal of the Superior Court’s decision to the Pennsylvania Supreme Court. The parties have filed their briefs and a decision on the request for appeal is pending. 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.
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
Our global operations give rise to exposure to market risks from changes in foreign currency exchange (“FX”) rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities’ functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated balance sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders’ equity as a component of accumulated other comprehensive income until the hedged item is recognized in earnings, or offset against the change in fair value of the hedged firm commitment through earnings. Any ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness is 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
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of the fair value of the forward contracts attributable to the difference between FX spot rates and FX forward rates. At September 30, 2013, we had deferred approximately $1.0 million of net gains on the effective portion of these derivative financial instruments in accumulated other comprehensive income. Assuming current market conditions continue, we expect to recognize substantially all of this amount in the next 12 months.
At September 30, 2013, substantially all of our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $98.5 million at September 30, 2013, with maturities extending to October 2014. 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 September 30, 2013 and December 31, 2012:
Derivatives Designated as Hedges:
FX Forward Contracts:
Accounts receivable-other
Other assets
Other liabilities
Derivatives Not Designated as Hedges:
Stock Warrants:
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The Effects of Derivative Instruments on our Financial Statements
Cash Flow Hedges:
Amount of income (loss) recognized in other comprehensive income
Income (loss) reclassified from accumulated other comprehensive income into earnings: effective portion
Other-net
Gain (loss) recognized in income: portion excluded from effectiveness testing
Gain (loss) recognized in income
Loss recognized in income
NOTE 7 – FAIR VALUE MEASUREMENTS
The following is a summary of our available-for-sale securities measured at fair value at September 30, 2013 (in thousands):
Mutual funds
U.S. Government and agency securities
Asset-backed securities and collateralized mortgage obligations
Commercial paper
Total
The following is a summary of our available-for-sale securities measured at fair value at December 31, 2012 (in thousands):
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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.
Derivatives
Level 2 derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. At September 30, 2013 and December 31, 2012, we had forward contracts outstanding to purchase or sell foreign currencies, primarily Canadian Dollars, with a total fair value of $1.9 million and $3.3 million, respectively.
Other Financial Instruments
We use the following methods and assumptions in estimating the fair value of 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 approximates their carrying value at September 30, 2013 and December 31, 2012.
NOTE 8 – STOCK-BASED COMPENSATION
Total stock-based compensation expense for all of our plans recognized for the three and nine months ended September 30, 2013 totaled $4.5 million and $14.2 million, respectively, with associated tax benefit recognized for the three and nine months ended September 30, 2013 totaling $1.8 million and $5.5 million, respectively. Total stock-based compensation expense recognized for the three and nine months ended September 30, 2012 totaled $4.6 million and $13.7 million, respectively, with associated tax benefit recognized for the three and nine months ended September 30, 2012 totaling $1.7 million and $5.0 million, respectively.
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NOTE 9 – SEGMENT REPORTING
As described in Note 1, our operations are assessed based on five segments. In connection with our segment reporting change we have revised historical amounts to conform to our current segment presentation. Operating results by segment are as follows:
REVENUES:
Power Generation
Nuclear Operations
Technical Services
Nuclear Energy
mPower
Adjustments and Eliminations(1)
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Power Generation Transfers
Nuclear Operations Transfers
Technical Services Transfers
Nuclear Energy Transfers
mPower Transfers
OPERATING INCOME:
Unallocated Corporate(1)
Special Charges for Restructuring Activities
Total Operating Income(2)
(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:
Equity in Income of Investees:
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NOTE 10 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Net income attributable to The Babcock & Wilcox Company
Weighted average common shares
Basic earnings per common share
Weighted average common shares (basic)
Effect of dilutive securities:
Stock options, restricted stock and performance shares
Adjusted weighted average common shares and assumed exercises of stock options and vesting of stock awards
Diluted earnings per common share
We have excluded from our diluted share calculation at September 30, 2013 and 2012, 525,716 and 1,144,849 shares, respectively, related to stock options as their effect would have been antidilutive.
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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 and combined financial statements and the related notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2012 (our “2012 10-K”).
In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean The Babcock & Wilcox Company (“B&W”) and its consolidated subsidiaries.
We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to avail ourselves of the “safe harbor” protection for forward-looking statements provided by federal securities law, including Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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,” “goal” or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
These forward looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:
In addition, various statements in this quarterly report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements.
These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
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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 2012 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. Prior to 2013, we reported four segments: Power Generation, Nuclear Operations, Technical Services and Nuclear Energy. Our small modular nuclear reactor business previously included in our Nuclear Energy segment is now being reported as a separate segment, mPower. The change in our reportable segments had no impact on our previously reported results of operations, financial condition or cash flows. For additional information regarding our change to the segments, see Note 1 to the condensed consolidated financial statements in this report.
Business Segments
In general, we operate in capital-intensive industries and rely on large contracts for a substantial amount of our revenues. We are currently exploring growth strategies across our segments through acquisitions to expand and complement our existing businesses. As we pursue these opportunities, we expect they would be funded by cash on hand, external financing (including debt), equity or some combination thereof.
Power Generation Segment
Our Power Generation segment’s overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. Several factors influence these expenditures, including:
Our Power Generation segment plans to continue efforts to expand international offerings through organic growth and potential partnering arrangements or acquisitions.
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.
The collective bargaining agreement covering approximately 350 employees at our Barberton, Ohio manufacturing facility has expired. As of September 30, 2013, these employees continued to work under the terms of the expired contract while we negotiate a new agreement and we continue to remain focused on meeting our customer’s needs. It is difficult to predict the outcome of these negotiations as of the date of this report. For additional discussion of risks associated with labor union negotiations, see the detailed risk factors contained in Item 1A of our 2012 10-K.
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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 April 29, 2013, the Government Accountability Office (“GAO”) announced that it sustained the protest filed by our joint venture, Nuclear Production Partners, LLC, regarding the procurement decision for the combined management and operating contract at the Y-12 National Security Complex and Pantex Plant. On June 17, 2013, Nuclear Production Partners, LLC filed a new protest with the GAO expressing concern over the fairness of the procurement and selection process and the form and scope of the revised request for proposals issued to bidders on June 6, 2013. On September 24, 2013, portions of this protest were dismissed as premature. However, the GAO did deny the assertion that the National Nuclear Security Administration (“NNSA”) should be required to amend the solicitation to reflect changes that have occurred due to the passage of time. On November 1, 2013, we received notification that Nuclear Production Partners, LLC was not selected by NNSA in the re-affirmed procurement decision. We will evaluate information received during the NNSA debriefing process to determine our next steps. In the meantime, we will continue to manage these sites under existing contracts through our joint ventures and during any transition period, which has yet to be determined.
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.
mPower Segment
This segment is actively developing the B&W mPowerTM reactor and the associated mPower Plant through its majority-owned joint venture, Generation mPower LLC (“GmP”). Its activity is a function of research and development efforts for the B&W mPowerTM reactor and the potential orders to be generated from various mPower deployment initiatives. As part of this initiative, we have been 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 that 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%, subject to the overall size of the award, of qualified expenditures incurred during the period from April 1, 2013 to March 31, 2018. The DOE has authorized $99.3 million of funding for this award program as of September 30, 2013. The remaining anticipated DOE funding has not yet been authorized and is subject to Congressional appropriations. The Cooperative Agreement also provides for reimbursement of pre-award costs incurred from October 1, 2012 to March 31, 2013. During the three and nine months ended September 30, 2013, we recognized $16.4 million and $54.2 million, respectively, of the cost-sharing award, including $21.5 million of pre-award cost reimbursement, as a reduction of research and development costs on our condensed consolidated statements of income.
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Global Competitiveness Initiative
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 $60 million to $70 million in annual savings. The majority of the annual savings are expected to result from efficiency improvements that are planned to be completed by the end of 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) not to exceed $60 million. We incurred $25.5 million of costs associated with GCI for the nine months ended September 30, 2013.
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 2012 10-K. There have been no material changes to these policies during the nine months ended September 30, 2013, except as disclosed in Note 1 of the notes to the condensed consolidated financial statements included in this report.
Accounting for Contracts
As of September 30, 2013, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. A principal risk on fixed-priced contracts is that revenue from the customer is insufficient to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects or provide performance guarantees. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows. In the nine months ended September 30, 2013 and 2012, we recognized changes in estimate related to long-term contracts accounted for on the percentage-of-completion basis, which increased operating income by approximately $11.9 million and $75.6 million, respectively. Included in the nine months ended September 30, 2013 were contract losses totaling $30.2 million for additional estimated costs to complete a project in our Power Generation segment. These losses are in addition to contract losses recorded for this project during 2012. In addition, in the nine months ended September 30, 2012, we recognized revenues totaling $18.4 million attributable to the settlement of a contract claim related to a condenser replacement contract in our Nuclear Energy segment.
Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under these provisions. These contracts define the conditions and timing under which our customers may make claims against us for liquidated damages. In the majority of cases in which we have had potential exposure for liquidated damages, such damages ultimately were determined not to be caused by our actions or were not otherwise asserted by our customers. Accordingly, we do not accrue liabilities for liquidated damages unless probable and estimable. As of September 30, 2013, we had not accrued for approximately $3.0 million of potential liquidated damages that are reasonably possible to be asserted based upon our current expectations of the time to complete a certain project.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2013 VS. THREE MONTHS ENDED SEPTEMBER 30, 2012
The Babcock & Wilcox Company (Consolidated)
Consolidated revenues decreased 4.1%, or $32.8 million, to $774.8 million in the three months ended September 30, 2013 compared to $807.6 million for the corresponding period in 2012 primarily due to decreases in revenues from our Nuclear Energy segment totaling $22.5 million. We also experienced decreases in revenues in our Nuclear Operations and Technical Services segments totaling $2.4 million and $0.8 million, respectively.
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Consolidated operating income decreased $2.3 million to $82.1 million in the three months ended September 30, 2013 from $84.4 million for the corresponding period in 2012. Operating income for the three months ended September 30, 2013 includes special charges for restructuring activities totaling $4.8 million related to the initiative we launched to enhance competitiveness, better position B&W for growth, and improve profitability. These costs consist of approximately $0.7 million of employee termination benefits, $2.5 million of consulting and other program administrative costs, and $1.6 million of facility consolidation charges due to planned reorganization of manufacturing activities. Operating income in our Power Generation and Nuclear Energy segments decreased by $2.3 million and $9.5 million, respectively. These decreases in operating income were partially offset by increases in our Nuclear Operations, Technical Services and mPower segments of $6.9 million, $6.7 million and $2.0 million, respectively. We also had higher unallocated corporate expenses totaling $1.3 million for the 2013 period as compared to 2012.
Revenues were flat at $427.0 million in the three months ended September 30, 2013 compared to $426.4 million in the corresponding period of 2012. Revenues for our aftermarket services business increased $45.3 million, which were offset by a decrease in our new build steam environmental equipment business of $32.9 million and a decrease in our new build steam generation systems business of $15.4 million. The increase in aftermarket services was primarily due to construction activity on a boiler retrofit project and a higher level of industrial plant maintenance outage services. The decrease in revenues from the new build businesses were due to the decline in project activities related to the advancement of various projects.
Operating income decreased $2.3 million to $38.3 million in the three months ended September 30, 2013 compared to $40.6 million in the corresponding period of 2012. The decrease in operating income is primarily attributable to lower margins on construction and outage maintenance services when compared to the project mix in the prior period and a lower level of net favorable project close-outs as compared to the prior period. The decrease was partially offset by lower overhead costs and a $3.1 million reduction in selling, general and administrative expenses due to ongoing cost reduction initiatives.
Revenues decreased 0.8%, or $2.4 million, to $282.1 million in the three months ended September 30, 2013 compared to $284.5 million in the corresponding period of 2012, primarily attributable to decreased activity in the manufacturing of nuclear components for U.S. Government programs totaling $9.8 million, partially offset by increased activity in our naval nuclear fuel and downblending activities totaling $7.4 million.
Operating income increased $6.9 million to $63.8 million in the three months ended September 30, 2013 compared to $56.9 million in the corresponding period in 2012, primarily due to increased income associated with naval nuclear fuel and downblending activities totaling $4.1 million. Income from the manufacturing of nuclear components for U.S. Government programs increased $2.8 million. These increases are related to improved contract performance associated with contract cost reductions.
Revenues decreased 3.1%, or $0.8 million, to $25.2 million in the three months ended September 30, 2013 compared to $26.0 million for the corresponding period of 2012, primarily attributable to lower reimbursable costs at our Naval Reactor decommissioning and decontamination project.
Operating income increased $6.7 million to $18.4 million in the three months ended September 30, 2013 compared to $11.7 million for the corresponding period of 2012. This increase is primarily attributable to improved project performance resulting in higher estimated award fees and $1.8 million of lower selling, general, and administrative expenses compared to the corresponding period of 2012 primarily due to timing of new proposals resulting in lower business development expenses.
Revenues decreased 30.0%, or $22.5 million, to $52.5 million in the three months ended September 30, 2013 compared to $75.0 million in the corresponding period of 2012, primarily attributable to decreased activity in our nuclear services and nuclear equipment businesses of $39.2 million associated with the completion of several large contracts that were ongoing in the same period of the prior year. This decline in revenue was partially offset by increased project activities associated with a contract in our nuclear projects business.
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Operating income decreased $9.5 million to $0.0 million in the three months ended September 30, 2013 compared to $9.5 million in the corresponding period of 2012, attributable to the decline in revenue noted above and lower margins due to unfavorable project mix compared to the prior period, which was partially offset by $4.0 million of warranty improvements associated with favorable warranty experience.
Operating income increased $2.0 million to a loss of $25.6 million in the three months ended September 30, 2013 compared to a loss of $27.6 million in the corresponding period of 2012. Research and development activities related to the continued development of the B&W mPower™ reactor increased by $13.5 million, offset by the recognition of $16.4 million of the cost-sharing award from the DOE under the Cooperative Agreement as a reduction of research and development costs. There was no cost-sharing award recognized within the corresponding period of 2012. Selling, general, and administrative expenses increased by $0.8 million compared to the corresponding period of 2012.
Corporate
Unallocated corporate expenses increased $1.3 million to $8.0 million for the three months ended September 30, 2013, as compared to $6.7 million for the corresponding period in 2012, mainly due to increased corporate business development costs, partially offset by the realization of benefits associated with GCI initiatives.
Other Income Statement Items
Other – net increased by $26.8 million to expense of $0.5 million for the three months ended September 30, 2013 as compared to expense of $27.3 million for the corresponding period in 2012, primarily due to the impairment of our USEC investment in the corresponding 2012 period totaling $27.0 million.
The provision for income taxes increased $17.1 million to $24.4 million, as compared to $7.3 million for the corresponding period of 2012, while our income before provision for income taxes increased $24.9 million. Accordingly, our effective tax rate for the three months ended September 30, 2013 was approximately 30.0% as compared to 12.8% for the three months ended September 30, 2012. The effective tax rate for the three month period in 2013 was higher than the effective tax rate for the comparable period in 2012 primarily due to the 2012 recognition of $25.3 million of previously unrecognized tax benefits for which the statute of limitations had expired and a $27 million impairment charge for which no associated tax benefit was recognized.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2013 VS. NINE MONTHS ENDED SEPTEMBER 30, 2012
Consolidated revenues increased 1.7%, or $40.3 million, to $2,466.4 million in the nine months ended September 30, 2013 compared to $2,426.1 million for the corresponding period in 2012 due to increases in revenues from our Nuclear Operations and Power Generation segments totaling $74.2 million and $21.9 million, respectively. These increases were partially offset by decreased revenues in our Nuclear Energy and Technical Services segments totaling $49.7 million and $1.4 million, respectively.
Consolidated operating income decreased $39.9 million to $241.0 million in the nine months ended September 30, 2013 from $280.9 million for the corresponding period in 2012. Operating income for the nine months ended September 30, 2013 includes special charges for restructuring activities totaling $25.5 million related to the initiative we launched to enhance competitiveness, better position B&W for growth, and improve profitability. These costs consist of approximately $15.8 million of employee termination benefits, $8.1 million of consulting and other program administrative costs and $1.6 million of facility consolidation charges due to planned reorganization of manufacturing activities. Operating income in our Power Generation and Nuclear Energy segments decreased by
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$36.0 million and $31.3 million, respectively. These decreases were partially offset by an increase in our mPower, Nuclear Operations, and Technical Services segments totaling $34.6 million, $17.2 million and $2.2 million, respectively. We also had higher unallocated corporate expenses totaling $0.9 million for the 2013 period as compared to 2012.
Revenues increased 1.6%, or $21.9 million, to $1,359.6 million in the nine months ended September 30, 2013 compared to $1,337.7 million in the corresponding period of 2012. The increase is principally driven by a $46.7 million increase in revenues from our new build environmental equipment business due to ongoing engineering, procurement and construction activities on projects as a result of the previously enacted environmental rules and regulations. Revenues in our new build steam generation systems business decreased $35.2 million, due to decreased activities on waste-to-energy and industrial boiler projects, as well as the impact of revised percentage-of-completion estimates for a project in which we recognized contract losses in the second quarter of 2013. Revenues in our aftermarket services business increased $5.5 million as an increase in boiler-related aftermarket retrofit projects, parts and services offset a decrease in environmental retrofit activity.
Operating income decreased $36.0 million to $102.2 million in the nine months ended September 30, 2013 compared to $138.2 million in the corresponding period of 2012, primarily due to contract losses totaling $30.2 million recorded in the second quarter of 2013 for additional estimated costs to complete a new build steam generation systems project experiencing unforeseen worksite conditions. These losses are in addition to contract losses recorded for this project during the fourth quarter of 2012. The income associated with the increase in revenues is offset by more competitive profit margins and a lower level of net favorable project close-outs than compared to the prior period. These decreases in income were partially offset by decreased overhead costs and a $7.4 million reduction in selling, general and administrative expenses due to ongoing cost reduction initiatives.
Revenues increased 9.3%, or $74.2 million, to $874.2 million in the nine months ended September 30, 2013 compared to $800.0 million in the corresponding period of 2012, primarily attributable to increased activity related to the manufacturing of nuclear components for U.S. Government programs totaling $49.2 million and increased activity in our naval nuclear fuel and downblending activities totaling $25.0 million.
Operating income increased $17.2 million to $184.3 million in the nine months ended September 30, 2013 compared to $167.1 million in the corresponding period in 2012, primarily due to increased income associated with naval nuclear fuel and downblending activities of $12.0 million. Income related to manufacturing of nuclear components for U.S. Government programs increased $5.2 million compared to 2012.
Revenues decreased 1.8%, or $1.4 million, to $77.9 million in the nine months ended September 30, 2013 compared to $79.3 million for the corresponding period of 2012, primarily attributable to lower reimbursable costs at our Naval Reactor decommissioning and decontamination project.
Operating income increased $2.2 million to $47.8 million in the nine months ended September 30, 2013 compared to $45.6 million for the corresponding period of 2012. This increase is attributable to improved project performance resulting in higher estimated award fees, fees from a new project award, and lower selling, general and administrative expenses of $4.2 million compared to the corresponding period of 2012 primarily due to timing of new proposals resulting in lower business development expenses. These increases were partially offset by costs related to restructuring of a contract and a $1.2 million gain realized in the prior period from the sale of our interest in a joint venture associated with the management and operations of the Strategic Petroleum Reserve.
Revenues decreased 21.7%, or $49.7 million, to $179.2 million in the nine months ended September 30, 2013 compared to $228.9 million in the corresponding period of 2012. The decrease in revenues is primarily attributable to decreased activity in our nuclear services and nuclear equipment businesses of $48.8 million associated with the completion of several large contracts that were ongoing in the same period of the prior year and $18.4 million of revenue recorded in the prior year related to the settlement agreement reached with Energy Northwest related to a condenser replacement project at Columbia Generating Station in 2011. This decline in revenue was partially offset by increased project activities associated with an ongoing long-term project in our nuclear projects business.
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Operating income decreased $31.3 million to $10.2 million in the nine months ended September 30, 2013 compared to $41.5 million in the corresponding period of 2012, primarily attributable to $18.1 million (net of related expenses) recognized in the nine months ended September 30, 2012 associated with the Energy Northwest settlement agreement discussed above. In addition, operating income also decreased as a result of the completion in 2012 of several large contracts noted above. These decreases were partially offset by $6.1 million of warranty improvements associated with favorable warranty experience.
Operating income increased $34.6 million to a loss of $53.6 million in the nine months ended September 30, 2013 compared to a loss of $88.2 million in the corresponding period of 2012. Research and development activities related to the continued development of the B&W mPower™ reactor increased by $16.2 million, offset by the recognition of $54.2 million of the cost-sharing award from the DOE under the Cooperative Agreement as a reduction of research and development costs. The cost-sharing amount recognized includes $21.5 million of pre-award cost reimbursement for the period from October 2012 through March 2013. Selling, general, and administrative expenses increased by $3.0 million compared to the corresponding period of 2012.
Unallocated corporate expenses increased $0.9 million to $24.3 million for the nine months ended September 30, 2013, as compared to $23.4 million for the corresponding period in 2012, due to increased corporate development and cyber security upgrade costs, partially offset by the realization of benefits associated with GCI initiatives.
Other – net increased by $25.9 million to income of $1.9 million for the nine months ended September 30, 2013 as compared to expense of $24.0 million for the corresponding period in 2012, primarily due to the impairment of our USEC investment in the 2012 period totaling $27.0 million.
The provision for income taxes decreased $4.4 million to $70.2 million, as compared to $74.6 million for the corresponding period of 2012, while our income before provision for income taxes decreased $13.5 million. Accordingly, our effective tax rate for the nine months ended September 30, 2013 was approximately 29.0% as compared to 29.2% for the nine months ended September 30, 2012. The effective tax rate for the nine month period in 2013 included certain tax benefits associated with 2012 R&D tax credits and foreign income exclusions related to the provisions of the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013. The effective tax rate in 2012 was impacted by the recognition of $25.3 million of previously unrecognized tax benefits related to the expiration of the statute of limitations in certain jurisdictions and a $27 million impairment charge for which no associated tax benefit was recognized.
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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.
(In millions)
Total Backlog
We do not include the value of our unconsolidated joint venture contracts in backlog. These unconsolidated joint ventures are included in our Power Generation, Technical Services, and Nuclear Energy segments.
Of the September 30, 2013 backlog, we expect to recognize revenues as follows:
(In approximate millions)
At September 30, 2013, Power Generation backlog with the U.S. Government was $39.5 million, all of which was fully funded.
At September 30, 2013, Nuclear Operations backlog with the U.S. Government was $2.5 billion, of which $181.9 million had not yet been funded.
At September 30, 2013, Technical Services backlog with the U.S. Government was $15.4 million, all of which was fully funded.
At September 30, 2013, Nuclear Energy and mPower had no backlog with the U.S. Government.
Liquidity and Capital Resources
Credit Facility
On June 8, 2012, B&W entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and letter of credit issuers, and Bank of America, N.A., as administrative agent which amends and restates our previous Credit Agreement dated May 3, 2010. The Credit Agreement provides for revolving credit borrowings and issuances of letters of credit in an aggregate outstanding amount of up to $700 million and is scheduled to mature June 8, 2017. The proceeds of the Credit Agreement are available for working capital needs and other general corporate purposes. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder, subject to an aggregate maximum of $1.0 billion for all revolving loan and letter of credit commitments.
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The Credit Agreement is guaranteed by substantially all of B&W’s wholly owned domestic subsidiaries. Obligations under the Credit Agreement are secured by first-priority liens on certain assets owned by B&W and the guarantors (other than subsidiaries comprising our Nuclear Operations and Technical Services segments). If the corporate family rating of B&W and its subsidiaries from Moody’s is Baa3 or better (with a stable outlook or better), the corporate rating of B&W and its subsidiaries from Standard & Poor’s is BBB- or better (with a stable outlook or better), and other conditions are met, the liens securing obligations under the Credit Agreement will be released, subject to reinstatement upon the terms set forth in the Credit Agreement.
The Credit Agreement requires only interest payments on a periodic basis until maturity. We may prepay all loans under the Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.
The Credit Agreement contains customary financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt and mergers. At September 30, 2013, we were in compliance with all of the covenants set forth in the Credit Agreement.
Loans outstanding under the Credit Agreement bear interest at our option at either the Eurocurrency rate plus a margin ranging from 1.25% to 2.25% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the one month Eurocurrency rate plus 1.0%, or the administrative agent’s prime rate) plus a margin ranging from 0.25% to 1.25% per year. The applicable margin for revolving loans varies depending on the credit ratings of the Credit Agreement. Under the Credit Agreement, we are charged a commitment fee on the unused portion of the Credit Agreement and that fee varies between 0.225% and 0.350% per year depending on the credit ratings of the Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.25% and 2.25% per year with respect to the amount of each financial letter of credit issued under the Credit Agreement and a letter of credit fee of between 0.80% and 1.25% per year with respect to the amount of each performance letter of credit issued under the Credit Agreement, in each case depending on the credit ratings of the Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement. In connection with entering into the Credit Agreement, we paid upfront fees to the lenders thereunder, and arrangement and other fees to the arrangers and agents of the Credit Agreement. At September 30, 2013, there were no borrowings outstanding and letters of credit issued under the Credit Agreement totaled $146.2 million, resulting in $553.8 million available for borrowings or to meet letter of credit requirements. The applicable interest rate at September 30, 2013 under this facility was 3.75% per year for revolving loans.
Based on the current credit ratings of the Credit Agreement, the applicable margin for Eurocurrency loans is 1.50%, the applicable margin for base rate loans is 0.50%, the letter of credit fee for financial letters of credit is 1.50%, the letter of credit fee for performance letters of credit is 0.875%, and the commitment fee for unused portions of the Credit Agreement is 0.25%. The Credit Agreement does not have a floor for the base rate or the Eurocurrency rate.
The Credit Agreement generally includes customary events of default for a secured credit facility. If any default occurs under the Credit Agreement, or if we are unable to make any of the representations and warranties in the Credit Agreement, we will be unable to borrow funds or have letters of credit issued under the Credit Agreement.
Other Arrangements
Certain subsidiaries in our Power Generation segment have credit arrangements with various commercial banks and other financial institutions for the issuance of bank guarantees in association with contracting activity. The aggregate value of all such bank guarantees as of September 30, 2013 was $87.4 million.
B&W and certain of its subsidiaries have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2013, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $435.7 million.
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In aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by $221.1 million to $319.2 million at September 30, 2013 from $540.3 million at December 31, 2012 primarily due to the items discussed below.
Our net cash used in operations was $6.0 million in the nine months ended September 30, 2013, compared to cash used in operations of $79.2 million for the nine months ended September 30, 2012. This decrease in cash used in operations was primarily attributable to reduced pension plan funding.
Our net cash provided by investing activities increased by $143.0 million to cash provided by investing activities of $7.9 million in the nine months ended September 30, 2013 from cash used in investing activities of $135.1 million in the nine months ended September 30, 2012. This increase in net cash provided by investing activities was primarily attributable to higher net purchases of available-for-sale securities in the prior year.
Our net cash used in financing activities increased by $159.9 million to $163.3 million in the nine months ended September 30, 2013 from $3.4 million for the nine months ended September 30, 2012. This increase in net cash used in financing activities was primarily attributable to the repurchase of common shares and dividends paid in the current period.
At September 30, 2013, we had investments with a fair value of $50.1 million. Our investment portfolio consists primarily of investments in government obligations and short-term commercial paper. Our investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of tax, reported as a component of other comprehensive loss.
Foreign Operations
Included in our total unrestricted cash and cash equivalents at September 30, 2013 is approximately $165.7 million held by foreign subsidiaries, which represents approximately 75% of our total unrestricted cash and cash equivalents. 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.
See Note 1 in our unaudited condensed consolidated financial statements included in this report for information on new and recently adopted accounting standards.
Our exposures to market risks have not changed materially from those disclosed in Item 7A included in Part II of our 2012 10-K.
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
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Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2013 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 three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
For information regarding ongoing investigations and litigation, see Note 5 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.
In addition to the risk factor below and the other information in this report, the other factors presented in Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 are some of the factors that could materially affect our business, financial condition or future results.
Obtaining DOE funding for our B&W mPower technology under the Cooperative Agreement is subject to future government appropriations and the ability of Babcock & Wilcox mPower, Inc. (“B&W mPower”) to comply with the terms of the Cooperative Agreement. B&W mPower’s inability to obtain continued funding under the Cooperative Agreement could impair or delay funding of our SMR research and development activities.
On April 12, 2013, B&W mPower, our wholly owned subsidiary, entered into a Cooperative Agreement establishing the terms and conditions of a funding award expected to initially total at least $150 million under the DOE SMR Licensing Technical Support Program.
Under the Cooperative Agreement, the DOE will provide incremental cost reimbursements for up to 50%, subject to the overall size of the award, of qualified expenditures incurred in connection with the development and commercialization of the SMR technology. The total estimated qualifying project costs during the five-year term of the funding program are approximately $765.8 million. Only a portion of the funding award has been authorized by the DOE, with the remaining amount subject to future Congressional appropriations. Our ability to obtain continued funding under the Cooperative Agreement is also dependent, in part, on our ability to perform our obligations under the Cooperative Agreement (including achieving specified milestones). In addition, the DOE may elect to not extend funding beyond the end of the then-current budget period (which is expected to occur on or about each anniversary of the date of the Cooperative Agreement). Lastly, either the DOE or B&W mPower may terminate the Cooperative Agreement at any time upon defined notice periods. Such a termination would eliminate the DOE’s obligation to continue funding under the award program. If we do not receive, or experience delays in obtaining, continued award program funding due to lack of Congressional appropriations or the other reasons described above, funding of our related research and development activities could be impaired or delayed.
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The following table provides information on our purchases of equity securities during the quarter ended September 30, 2013:
Period
July 1, 2013 – July 31, 2013
August 1, 2013 – August 31, 2013
September 1, 2013 – September 30, 2013
We own an interest in and 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.
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 (incorporated by reference to Exhibit 3.1 to The Babcock & Wilcox Company’s Current Report on Form 8-K dated September 9, 2013 (File No. 1-34658)).
Exhibit 10.1*+ – Form of Director and Officer Indemnification Agreement entered into between The Babcock & Wilcox Company and each of its directors and executive officers (incorporated by reference to Exhibit 10.4 to The Babcock & Wilcox Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 1-34658)).
Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
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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
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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.
/s/ Anthony S. Colatrella
/s/ David S. Black
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EXHIBIT INDEX
Exhibit
Number
Management or compensatory contract.