Business Context and Reporting Period
The filing is The Babcock & Wilcox Company’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 7, 2012. The company operated through four segments: Power Generation, Nuclear Operations, Technical Services, and Nuclear Energy.
Its businesses serve commercial power, renewable and environmental markets, U.S. government nuclear and defense programs, government technical-services programs, and commercial nuclear customers, including development of the B&W mPower small modular reactor.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $852.6 million | $752.4 million | $1.618 billion | $1.444 billion |
| Operating income | $89.4 million | $63.3 million | $155.1 million | $85.2 million |
| Operating margin | 10.5% | 8.4% | 9.6% | 5.9% |
| Net income attributable to B&W | $64.0 million | $46.2 million | $110.8 million | $59.7 million |
| Net margin attributable to B&W | 7.5% | 6.1% | 6.8% | 4.1% |
| Diluted EPS | $0.54 | $0.39 | $0.93 | $0.51 |
| Cash flow from operations | Not separately provided | Not separately provided | $(74.7) million | $(51.6) million |
Interest expense was $1.2 million in the quarter and $1.8 million for the six months. The effective tax rate was approximately 34.3% for the quarter and 33.2% for the six months, compared with 30.5% and 29.9%, respectively, in the prior-year periods.
Balance Sheet, Liquidity, and Debt
- Cash and cash equivalents were $206.8 million at June 30, 2012, compared with $415.2 million at December 31, 2011.
- Restricted cash was approximately $59.5 million, and investments had a fair value of $159.5 million. Aggregate cash, restricted cash, and investments totaled approximately $425.8 million, down from $551.1 million at year-end.
- Total debt was approximately $5.1 million, consisting of $4.6 million of current maturities and $0.5 million of long-term debt.
- The new revolving credit facility, entered into June 8, 2012, provides commitments of up to $700 million and matures June 8, 2017. There were no borrowings outstanding at June 30; $208.6 million of letters of credit were outstanding, leaving $491.4 million available.
- The company was in compliance with all credit agreement covenants at June 30, 2012.
- Six-month capital expenditures were $41.5 million. Pension contributions were $185.6 million, substantially completing expected 2012 funding.
- Approximately $149.3 million, or 72%, of unrestricted cash related to foreign operations and was not generally available for U.S. operations without potential tax consequences.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 13.3%, and six-month revenue increased 12.1%, primarily because of higher Power Generation activity.
- Second-quarter operating income increased 41.3%, while six-month operating income increased 82.0%. Margin expansion reflected higher Power Generation revenue and improved Nuclear Energy results.
- Power Generation revenue increased 27.9% in the quarter and 22.4% for the six months, driven by environmental equipment, waste-to-energy, biomass, and related projects.
- Nuclear Operations revenue declined 2.6% in the quarter and 1.4% for the six months. Six-month operating income nevertheless increased due to improved contract performance.
- Technical Services revenue declined 7.8% in the quarter and 9.8% for the six months, primarily because of lower American Centrifuge-related activity, while operating income increased because of equity income from investees and other favorable items.
- Nuclear Energy revenue declined 28.2% in the quarter and 3.2% for the six months, but the segment’s operating loss narrowed to $12.9 million in the quarter and $29.8 million for the six months.
- The prior-year periods included substantial Nuclear Energy and Nuclear Operations project cost overruns, including $26.0 million in the second quarter of 2011 and $58.7 million for the first six months of 2011. The company stated that these projects were substantially complete or complete.
- Backlog increased to $5.713 billion at June 30, 2012, from $5.339 billion at December 31, 2011. Power Generation backlog rose to $2.529 billion, while Nuclear Operations backlog was $2.860 billion.
Guidance, Outlook, Risks, and Unusual Items
- Management expected positive operating cash flow for the remainder of 2012, but cautioned that quarterly operating results were not necessarily indicative of full-year results. No specific earnings or revenue guidance was provided in the filing text.
- A May 2012 settlement with Energy Northwest related to the Columbia Generating Station condenser project produced $18.4 million of revenue and approximately $18.1 million of net operating benefit in the second quarter and six-month period.
- Research and development expense increased substantially because of continued development of the B&W mPower reactor. In-kind services contributed by a minority partner generated $8.7 million of non-cash, nondeductible research and development expense for the six months and reduced attributable net income by approximately $3.0 million.
- The company had an unfunded pension liability of $501.3 million at June 30, 2012, compared with $586.0 million at year-end, but pension funding remains a material liquidity consideration.
- Potential U.S. government spending reductions and sequestration could materially affect Nuclear Operations and Technical Services. A security breach at the Y-12 National Security Complex in late July 2012 created uncertain potential consequences for a joint venture managed by the company.
- Fixed-price contract estimates remain subject to labor productivity, material costs, scope, scheduling, warranty, performance guarantee, and liquidated-damages risks. Changes in contract estimates increased operating income by approximately $47.6 million in the first six months of 2012.
- Material contingencies include litigation involving alleged radioactive releases at the Nuclear Fuel Services facility and former Apollo and Parks Township facilities. The company stated that outcomes were uncertain and that adverse results could materially affect financial condition, results, and cash flow.
- The company had $31.8 million of gross unrecognized tax benefits and stated that approximately $24.6 million could potentially decrease within the following 12 months as statutes of limitation expire.
- The company’s USEC investment totaled approximately $45.1 million at June 30, 2012. USEC had not satisfied conditions for later investment phases, and the parties retained termination rights under the original agreement.
Most Important Facts for Investors to Verify
- Whether the Energy Northwest settlement and prior-year project overruns distort period-over-period comparisons and the sustainability of Nuclear Energy improvement.
- Conversion of reported earnings into cash, particularly after $185.6 million of pension contributions and negative six-month operating cash flow.
- The adequacy and availability of cash held by foreign subsidiaries, restricted cash, investments, and the $491.4 million remaining credit-facility capacity.
- Future performance of fixed-price contracts, warranty reserves, backlog conversion, and potential additional contract-cost adjustments.
- Effects of U.S. budget reductions, sequestration, the Y-12 security incident, and changes in nuclear and environmental regulations.
- Exposure from pension and postretirement obligations, environmental liabilities, tax contingencies, litigation, insurance coverage, and indemnification arrangements.
- Investment performance and potential impairment risk associated with USEC and other unconsolidated affiliates.
- Development costs, funding, regulatory approvals, and commercialization prospects for the B&W mPower reactor.