BWXT

Business Context and Reporting Period

Company: The Babcock & Wilcox Company (BWX Technologies, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The company operates in four reportable segments: Power Generation, Nuclear Operations, Technical Services, and Nuclear Energy. This filing represents the first full quarter as an independent public company following its spin-off from McDermott International, Inc. in July 2010. The company reclassified its segment reporting structure effective March 31, 2011, splitting former segments into the four current categories.

Key Financial Metrics

Note: Q1 2010 figures represent combined results of The Babcock & Wilcox Operations of McDermott International, Inc. prior to the spin-off.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 4.4% ($28.9 million) year-over-year, driven by growth in Technical Services (+45%), Nuclear Energy (+17%), and Nuclear Operations (+7%). Power Generation revenue remained flat (+0.1%).
• Operating Income Decline: Operating income decreased 43.5% ($16.8 million) to $21.9 million. The decline was primarily driven by a significant operating loss in the Nuclear Energy segment ($37.5 million loss vs. $11.4 million loss in 2010) due to increased costs to complete projects and higher R&D expenses for the mPower reactor.
• Corporate Expenses: Unallocated corporate expenses increased $4.0 million to $9.8 million, attributed to costs associated with operating as a standalone public company and higher stock-based compensation.
• Interest Expense: Interest expense dropped significantly to $0.5 million from $6.0 million in the prior year, as intercompany borrowings from the parent company were forgiven during the spin-off.
• Tax Rate: The effective tax rate decreased to 27.73% from 44.02%, aided by tax credits and a $2.5 million benefit from tax authority settlements.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Power Generation: Management anticipates increased demand for environmental equipment as the EPA revises greenhouse gas regulations, expected by late 2011. However, uncertainty has caused some customers to delay capital expenditures or close inefficient coal plants.
• Nuclear Energy: The company is actively developing the mPower small modular reactor. Management notes that the March 2011 earthquakes and tsunami in Japan have created uncertainty in the global nuclear industry, potentially slowing licensing and construction of new facilities, though no specific project delays have been confirmed to date.
• Backlog: Total backlog stood at $4.907 billion as of March 31, 2011, a decrease from $5.202 billion at year-end 2010. Approximately $1.6 billion is expected to be recognized in 2011.

Risks and Contingencies

• Japan Nuclear Incident: Potential for increased regulatory oversight and reduced demand for nuclear power globally following the Fukushima-Daiichi incident.
• Legal Proceedings: Ongoing litigation involving over 90 claimants regarding alleged radioactive releases at former facilities in Pennsylvania (Apollo and Parks Litigation). The company intends to defend vigorously and believes claims will be covered by insurance or indemnity from ARCO.
• Contract Risks: The company operates on fixed-price contracts where cost overruns due to productivity or material price fluctuations could materially impact results. In Q1 2011, $32.7 million in additional costs were recorded due to changes in estimates.

Investor Verification Checklist

• Nuclear Energy Segment Losses: Verify the sustainability of the $37.5 million operating loss in the Nuclear Energy segment and the timeline for cost stabilization on ongoing projects.
• Japan Impact Assessment: Monitor for specific delays or cancellations in the $472 million Nuclear Energy backlog resulting from post-Fukushima regulatory changes.
• Cash Flow Trends: Review the $81.6 million net cash used in operating activities, driven by increases in accounts receivable and prepaid expenses, to ensure liquidity remains sufficient for operations and pension obligations.
• Legal Exposure: Track the status of the Apollo and Parks Litigation and the related insurance recovery efforts (ANI Litigation).
• Segment Reclassification: Ensure comparability of future results by noting the change from two to four reporting segments effective Q1 2011.