Business Context and Reporting Period
The filing is The Babcock & Wilcox Company’s Form 10-Q for the quarter ended March 31, 2013, filed May 7, 2013. The company operated through five segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy, and mPower. The mPower small modular reactor business was reported as a separate segment beginning in 2013, with prior-period information reclassified accordingly.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $805.4 million | $765.9 million | Up 5.2% |
| Operating income | $60.2 million | $86.4 million | Down $26.2 million |
| Operating margin | 7.5% | 11.3% | Down 3.8 percentage points |
| Net income | $44.9 million | $57.1 million | Down 21.4% |
| Net income attributable to the company | $47.2 million | $60.0 million | Down 21.3% |
| Basic/diluted EPS | $0.41/$0.41 | $0.51/$0.50 | Lower year over year |
| Net cash used in operating activities | $26.3 million | $103.2 million | Improved by $76.9 million |
- Revenue growth was led by Power Generation, up $47.2 million, and Nuclear Operations, up $10.9 million. Nuclear Energy revenue declined $23.1 million.
- Cost of operations increased to $619.7 million from $563.9 million, outpacing revenue growth. Special restructuring charges were $8.4 million versus none in the prior-year quarter.
- Effective tax rate was approximately 26.6%, compared with 32.8%, reflecting tax benefits related to 2012 research and development credits and foreign income exclusions.
- Cash and cash equivalents were $261.1 million at March 31, 2013, compared with $383.5 million at December 31, 2012. Cash, restricted cash and investments totaled approximately $422.2 million, down from $540.3 million.
- Debt was minimal: notes payable and current maturities were $4.1 million and long-term debt was $0.4 million. No borrowings were outstanding under the $700 million revolving credit facility; $151.9 million of letters of credit reduced availability to $548.1 million.
- Restricted cash and cash equivalents totaled approximately $63.5 million, including $51.8 million for captive-insurer reinsurance reserves.
- Capital expenditures were $18.8 million. Financing cash outflows included $57.1 million of share repurchases and $9.1 million of dividends.
- The pension liability was $579.3 million, and the accumulated postretirement benefit obligation was $69.3 million.
Material Changes Versus the Prior Comparable Period
- Power Generation: Revenue increased 11.4% to $461.5 million, primarily from higher environmental equipment activity, but operating income fell 15.6% to $33.3 million due to more competitive margins and fewer project cost improvements and favorable closeouts.
- Nuclear Operations: Revenue increased 4.4% to $261.1 million, while operating income was essentially unchanged at $54.7 million.
- Technical Services: Revenue was broadly stable at $25.2 million; operating income declined to $14.2 million, principally because of lower estimated award fees and higher costs on certain NNSA contracts.
- Nuclear Energy: Revenue declined 26.7% to $63.5 million and operating income fell to $2.3 million as several large prior-year contracts were completed.
- mPower: Operating loss improved modestly to $26.9 million from $27.9 million, primarily due to lower research and development costs.
- Backlog declined to $5.487 billion from $5.749 billion at year-end 2012. Approximately $1.817 billion was expected to convert to revenue during 2013, $1.080 billion during 2014, and $2.590 billion thereafter.
- The company repurchased 2.153 million shares under its announced program for approximately $57.1 million, reducing weighted-average basic shares to 114.1 million from 118.3 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The Global Competitiveness Initiative is expected to generate $40 million to $50 million of annual savings when fully implemented. Approximately half is expected by the end of 2013 and the remainder by mid-2015. Total restructuring charges are not expected to exceed $60 million; $8.4 million was incurred in the quarter.
- Management expected 2013 mPower spending to remain between $85 million and $95 million, net of DOE reimbursements. The DOE funding award is expected to total at least $150 million, but only $78.8 million was authorized as of April 1, 2013; additional funding is subject to Congressional appropriations and performance milestones. Approximately $22 million of eligible pre-award costs was expected to be submitted for reimbursement in the second quarter.
- The DOE Cooperative Agreement provides reimbursement of up to 50% of qualified mPower expenditures from April 1, 2013 through March 31, 2018. The planned first commercial mPower Plant operating date was 2022.
- Approximately $6.0 million of potential liquidated damages on a Power Generation project had not been accrued because the amounts were not currently due and were not considered probable and estimable.
- Fixed-price and percentage-of-completion contracts remain exposed to labor productivity, raw-material costs, schedule performance, contract estimates, warranty costs, and potential liquidated damages. Changes in contract estimates increased operating income by approximately $14.2 million in Q1 2013, compared with $20.3 million in Q1 2012.
- The company had a $579.3 million pension liability and identified unfunded pension obligations and continued government reimbursement of related costs as liquidity risks.
- The company’s USEC preferred-stock investment had a remaining book value of $19.1 million after a $27.0 million impairment in 2012. USEC had reported a $1.1 billion impairment, a stockholders’ deficit, and substantial doubt about its ability to continue as a going concern. B&W was monitoring restructuring discussions and had not recognized amounts potentially recoverable from related claims.
- The Apollo and Parks nuclear-related litigation remained pending, involving approximately 85 primary claimants. Insurance and an ARCO indemnity were expected to provide coverage, but their availability and sufficiency were not assured.
- The company had approximately $456.2 million of surety bonds outstanding and $62.1 million of bank guarantees supporting contracting activity.
- On May 3, 2013, the board declared a further $0.08-per-share dividend and authorized up to $250 million of additional share repurchases over two years.
- The company stated that its disclosure controls were effective and that it was in compliance with the credit facility’s covenants as of March 31, 2013.
Most Important Facts for Investors to Verify
- Whether Power Generation margins recover despite competitive pricing and whether environmental-equipment backlog converts as expected.
- The timing and profitability of Nuclear Energy replacement work following completion of large contracts.
- Actual GCI savings, total restructuring charges, and cash costs relative to management’s targets.
- DOE appropriations, reimbursement timing, and milestone performance for the mPower program.
- Cash conversion from contracts in progress, advance billings, pension funding, and restricted cash requirements.
- USEC’s restructuring outcome and the recoverability of B&W’s remaining investment.
- Potential exposure from liquidated damages, warranty obligations, environmental matters, litigation, insurance coverage, and indemnities.
- Backlog funding and cancellation risk, particularly the $183.4 million of Nuclear Operations government backlog that was not yet funded.