The Babcock & Wilcox Company (NYSE: BWC) (“B&W” or the “Company”) today reported earnings per share for the third quarter ended September 30, 2010 of $0.31, an increase of 40.9% from the third quarter of 2009. Revenues for the third quarter of 2010 were $632.8 million, a decrease of $16.2 million or 2.5% from the third quarter of 2009.

Recent Highlights
  • Selected to supply B&W’s oxy-coal combustion technology as part of the $1 billion Department of Energy (DOE) FutureGen 2.0 Carbon Capture and Sequestration project
  • Awarded 10-year, $2.1 billion DOE decontamination and decommissioning contract for the Portsmouth Gaseous Diffusion plant in Ohio, in alliance with Fluor
  • Announced contract awarded to Babcock & Wilcox Beijing Company Ltd. to manufacture two 1,000 MW ultra-supercritical coal fired boilers for the domestic Chinese market
  • Awarded replacement nuclear steam generator contract with IMPSA in Argentina
  • Awarded design and manufacture contract for two nuclear steam generators for the Tennessee Valley Authority (TVA) Bellefonte Plant
  • Awarded design, engineering and construction of SCR environmental system for control of nitrogen oxides for Michigan power plant
  • Awarded design, engineering and construction of 33 MW multi-fuel waste plant in Sweden

Government Operations Segment

Revenues of $265.1 million increased $5.3 million or 2.1% in the third quarter of 2010 compared to the third quarter of 2009. This increase is principally the result of an increase in activity for nuclear reactor components partially offset by a reduction in revenues for the manufacture of components for a commercial uranium enrichment project.

Operating income of $48.1 million increased $28.3 million, or 143% in the third quarter of 2010 compared to the third quarter of 2009. This increase is principally related to productivity and project execution improvement on the production of nuclear reactor components, an increase in fees earned due to higher funding levels and productivity at the Company’s management and operations sites and an improvement in operating results and favorable contingency resolution at the Company’s highly enriched uranium nuclear fuel manufacturing facility.

“Our core defense related businesses continue to execute at a high level of proficiency on their existing contracts and we expect this performance to continue in the future. Additionally, we have been successful leveraging our expertise in nuclear technologies and high-consequence, mission-critical defense capabilities to expand our portfolio and sources of revenues and earnings, such as the recent $2.1 billion Portsmouth decontamination and decommissioning contract, and securing our position as program manager for the American Centrifuge Project (ACP),” said Brandon C. Bethards, President and Chief Executive Officer of B&W.

Power Generation Systems Segment

Revenues of $369.0 million for the third quarter of 2010 declined $20.6 million or 5.3% compared to the third quarter of 2009. This decrease was principally related to a decline in demand for new-build coal fired generation systems and services in the U.S., partially offset by increasing volumes in renewable power generation systems. Backlog in the power generation systems segment increased $205.1 million, or 11.3% from the end of the second quarter of 2010. This increase is principally due to our success in the U.S. and international nuclear services market, power and environmental aftermarket services and growth in energy from waste and biomass in Europe.

Operating income was $20.4 million in the third quarter of 2010 compared to $34.2 million in the third quarter of 2009. The decrease in operating income is principally related to improvement in contract execution offset by the decline in market demand for the Company’s fossil power generation products and services in the U.S. and an increase in research and development efforts for the Company’s modular nuclear reactor (B&W mPower) program. Selling, general and administrative expenses have been reduced over time with market demand, offset by increases related to acquired businesses and the Company’s modular nuclear reactor technology program. Research, development and administrative expenses related to the Company’s modular nuclear reactor technology program were higher in the third quarter of 2010 by approximately $9.9 million compared to the third quarter of 2009.

“Our U.S. fossil power business continues to achieve the results we would expect at this point in the business cycle with parts and services flattening out and new-build fossil power generation projects continuing to roll-out of backlog. Importantly, the Company is beginning to experience an increase in customer interest related to planning for environmental equipment purchases and installation services in order to achieve compliance with the EPA’s new rules and regulations which are expected to be finalized next year,” Bethards said.

Research and Development

During the third quarter, the Company incurred approximately $17.4 million of research and development costs. In addition to the ongoing investment in R&D at our state-of-the art environmental and fossil power research facility, the Company has ongoing research programs for small modular nuclear reactor technology and environmental equipment technology. For the first nine months of 2010, total internal research and development expenses were $50.7 million, an increase of $17.6 million over the same period in 2009.

Liquidity

The Company’s net cash and investments position was $256.1 million at the end of the third quarter of 2010, a decrease of $67.6 million from the end of the second quarter of 2010. During the quarter, the Company generated approximately $18.1 million of cash flow from operating activities which included a pension contribution of approximately $55.9 million. Also during the quarter the Company made its first tranche investment in USEC of $37.5 million. In addition to net cash, the Company maintains a $700 million revolving credit agreement with approximately $475 million of availability as of the end of the third quarter. The Company continues to maintain adequate liquidity to fund operations, which could include increased working capital requirements, internal growth, and research and development programs, as well as additional product and geographic expansion opportunities.

Outlook

“Underlying business trends in the power generation systems segment during the third quarter were essentially unchanged. We are encouraged by data suggesting continued industrial expansion and increasing electricity consumption, which has led to higher utilization of the U.S. power generation fleet. We expect this to lead utilities to become more constructive towards their maintenance programs for the existing fleet in the short to medium term. Additionally, the multiple EPA regulations expected to be completed in 2011 are leading power generation providers to take a comprehensive look at their entire power generation system to determine the best path to comply with the new rules,” Bethards continued. “Assuming that the Government’s budget appropriation cycle and customer contract negotiations are completed during the fourth quarter, we expect that the government operations segment will end the fourth quarter with the highest backlog in its history,” Bethards concluded.

Basis of Presentation

The Babcock & Wilcox Company operates in two business segments: Power Generation Systems and Government Operations, and was a wholly owned subsidiary of McDermott International, Inc., a Panamanian corporation, (“MII”) until July 30, 2010 when MII distributed 100% of our outstanding common stock to the MII shareholders. On and prior to July 30, 2010, our financial position, operating results and cash flows consisted of The Babcock & Wilcox Operations of McDermott International, Inc., (“BWO”), which represented a combined reporting entity comprised of the assets and liabilities in managing and operating the Power Generation Systems and Government Operations segments of MII in addition to two captive insurance companies which have been combined and contributed to B&W in conjunction with the spin-off of B&W by MII. On our condensed consolidated and combined balance sheets, the period ended September 30, 2010 consists of the consolidated results of B&W, while the period ended December 31, 2009 consists of the combined results of BWO. On our condensed consolidated and combined statements of income, the three and nine months ended September 30, 2010, include the combined results of operations for one month and seven months, respectively, of BWO, and two months of the consolidated results of B&W, while the three and nine months ended September 30, 2009 consist entirely of the combined results of BWO. Our condensed consolidated and combined statements of cash flows for the nine months ended September 30, 2010 consist of seven months of combined results for BWO, and two months of consolidated results for B&W, while the nine months ended September 30, 2009 consist entirely of the combined results of BWO.

Conference Call to Discuss Third Quarter 2010 Results

Date: Tuesday, November 9, 2010, at 8:30 a.m. ET

Live Webcast: Investor Relations section of website at www.babcock.com

Forward-Looking Statements

B&W cautions that this release contains forward-looking statements, including, without limitation, statements relating to our expectation of continued high level performance on existing defense related contracts, our expectation that our government operations segment will end the fourth quarter of 2010 with the highest backlog in its history, the timing of final EPA regulations and rules and our expectation that utilities will become more constructive towards their maintenance programs in the short to medium term. These forward-looking statements are based on current management expectations and involve a number of risks and uncertainties, including, among other things, adverse changes in the demand for industrial electricity usage, continued uncertainty regarding new environmental regulations and the timing of the Government’s budget appropriation cycle. If one or more of these or other risks materialize, actual results may vary materially from those expected. For a more complete discussion of these and other risk factors, please see B&W’s filings with the Securities and Exchange Commission, including its registration statement on Form 10, as amended. B&W cautions not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and undertakes no obligation to update or revise any forward-looking statement, except to the extent required by applicable law.

About B&W

The Babcock & Wilcox Company is a leader in clean energy technology and services, primarily for the nuclear, fossil and renewable power markets as well as a premier advanced technology and mission critical defense contractor. B&W has locations worldwide and employs approximately 12,000 people, in addition to approximately 10,000 joint venture employees. A company overview presentation, which will be presented at investor conferences and meetings throughout this quarter, is available on the Investor Relations section of our website. For additional information please visit our website at www.babcock.com .

TABLES TO FOLLOW
THE BABCOCK & WILCOX COMPANY
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
 
ASSETS
September 30, December 31,
2010 2009
(Unaudited)
(In thousands)
 
 
Current Assets:
Cash and cash equivalents $ 177,656 $ 469,468
Restricted cash and cash equivalents 11,243 15,305
Investments 351 14
Accounts receivable – trade, net 337,216 319,861
Accounts receivable – other 60,539 39,289
Contracts in progress 304,943 245,998
Inventories 101,173 98,644
Deferred income taxes 82,361 96,680
Other current assets   28,183     21,456
 
Total Current Assets   1,103,665     1,306,715
 
Property, Plant and Equipment 952,172 945,298
Less accumulated depreciation   537,852     515,237
 
Net Property, Plant and Equipment   414,320     430,061
 
Investments   75,054     73,540
 
Goodwill   275,707     262,866
 
Deferred Income Taxes   235,559     270,002
 
Investments in Unconsolidated Affiliates   101,315     68,327
 
Note Receivable from Affiliate   -     42,573
 
Other Assets   184,266     149,775
 
TOTAL $ 2,389,886   $ 2,603,859

THE BABCOCK & WILCOX COMPANY
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
 
LIABILITIES AND STOCKHOLDER AND PARENT EQUITY
 
September 30, December 31,
2010 2009
(Unaudited)
(In thousands)
 
 
Current Liabilities:
Notes payable and current maturities of long-term debt $ 7,240 $ 6,432
Accounts payable 164,008 178,350
Accounts payable to McDermott International, Inc. - 112,053
Accrued employee benefits 218,889 198,195
Accrued liabilities – other 78,409 74,700
Advance billings on contracts 392,626 537,448
Accrued warranty expense 111,167 115,055
Income taxes payable   2,566       12,943
 
Total Current Liabilities   974,905       1,235,176
 
Long-Term Debt   964       4,222
 
Accumulated Postretirement Benefit Obligation   100,554       105,484
 
Environmental Liabilities   40,700       47,795
 
Pension Liability   472,130       699,117
 
Notes Payable to Affiliate   -       320,568
 
Other Liabilities   104,622       70,791
Commitments and Contingencies
 
Stockholders’ and Parent Equity:      

Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 116,743,437 and 0 shares at September 30, 2010 and December 31, 2009, respectively
1,167 -

Preferred stock, par value $0.01 per share, authorized 75,000,000 shares; No shares issued
-
Capital in excess of par value 1,056,655 -
Retained earnings 43,779 -

Treasury stock at cost, 92,643 and 0 shares at September 30, 2010 and December 31, 2009, respectively
(2,189 ) -
Accumulated other comprehensive loss   (403,959 )     -
Stockholders’ Equity – The Babcock & Wilcox Company 695,453 -
Noncontrolling interest   558       -
Total Stockholders’Equity   696,011       -
 
Total Parent Equity   -       120,706
 
TOTAL $ 2,389,886     $ 2,603,859

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
 
Three Months Ended Nine Months Ended
September 30, September 30,

2010

2009

2010

2009
(Unaudited)
(In thousands, except share and per share amounts)
 
 
Revenues $ 632,765   $ 648,997   $ 1,983,649   $ 2,166,119  
 
Costs and Expenses:
Cost of operations 485,926 513,803 1,549,246 1,678,206
Losses on asset disposals – net 40 443 88 620
Selling, general and administrative expenses   98,708     102,279     293,277     289,444  
Total Costs and Expenses   584,674     616,525     1,842,611     1,968,270  
 
Equity in Income of Investees   16,986     13,646     48,440     34,144  
 
Operating Income   65,077     46,118     189,478     231,993  
 
Other Income (Expense):
Interest income 182 692 892 2,874
Interest expense (660 ) (5,624 ) (11,329 ) (17,858 )
Other income (expense) – net   (6,451 )   (3,168 )   (13,486 )   (12,711 )
Total Other Expense   (6,929 )   (8,100 )   (23,923 )   (27,695 )
 
Income before Provision for Income Taxes 58,148 38,018 165,555 204,298
 
Provision for Income Taxes   22,224     11,697     65,063     75,981  
 
Net Income   35,924     26,321     100,492     128,317  
 
Less: Net Income Attributable to Noncontrolling Interest   (37 )   (36 )   (122 )   (131 )
 
Net Income Attributable to The Babcock & Wilcox Company $ 35,887   $ 26,285   $ 100,370   $ 128,186  
 
Earnings per Share:
Basic:

Net Income Attributable to The Babcock & Wilcox Company
$ 0.31 $ 0.23 $ 0.86 $ 1.10
Diluted:

Net Income Attributable to The Babcock & Wilcox Company
$ 0.31   $ 0.22   $ 0.85   $ 1.09  
 
Shares used in the computation of earnings per share:
Basic 116,291,477 116,067,535 116,142,182 116,067,535
Diluted 117,647,749 117,423,807 117,498,454 117,423,807

THE BABCOCK & WILCOX COMPANY

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
September 30,

2010
 

2009
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 100,492     $ 128,317  
Non-cash items included in net income:
Depreciation and amortization 53,000 54,190
Income of investees, less dividends (27,104 ) (14,254 )
Loss on asset disposals – net 88 620
Amortization of pension and postretirement costs 62,553 64,716
Excess tax benefits from stock-based compensation (2,653 ) 1,813
Other, net (17,513 ) (25,427 )
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable 48,832 88,849
Net contracts in progress and advance billings on contracts (209,171 ) (93,566 )
Accounts payable 2,502 37,200
Inventories 5,543 14,520
Current and deferred income taxes 11,339 11,852
Accrued and other current liabilities 34 (53,277 )
Pension liability, accumulated postretirement benefit obligation and accrued employee benefits (104,698 ) (28,870 )
Other, net   38,242       (40,329 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (38,514 )     146,354  
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash and cash equivalents 4,062 (12,987 )
Purchases of property, plant and equipment (48,783 ) (66,655 )
Acquisition of businesses, net of cash acquired (30,177 ) (8,497 )
Decrease in note receivable from affiliate 43,277 -
Net (increase) decrease in available-for-sale securities (1,379 ) 48,541
Investment in equity and cost method investees (37,844 ) (2,700 )
Proceeds from asset disposals   1,016       197  
NET CASH USED IN INVESTING ACTIVITIES   (69,828 )     (42,101 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of short-term borrowing and long-term debt (2,313 ) (5,651 )
Payment of debt issuance costs (9,865 ) -
Increase in short-term borrowing - 1,606
Dividend paid to McDermott International, Inc. (100,000 ) -
Capital contribution from McDermott International, Inc. 12,501 -
Distribution to McDermott International, Inc. (43,334 ) -
(Decrease) increase in notes payable to affiliates (43,386 ) 861
Excess tax benefits from stock-based compensation 2,653 (1,813 )
Other, net   116       (164 )
NET CASH USED IN FINANCING ACTIVITIES   (183,628 )     (5,161 )
EFFECTS OF EXCHANGE RATE CHANGES ON CASH   158       9,691  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (291,812 ) 108,783
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   469,468       279,646  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 177,656     $ 388,429  
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 2,576 $ 333
Income taxes (net of refunds) $ 21,442     $ (33,621 )

The Babcock & Wilcox Company
Business Segment Information
For the Periods Ended September 30, 2010 and 2009
(In thousands of U.S. dollars)
   
THREE MONTHS ENDED NINE MONTHS ENDED

REVENUES:

9/30/10

9/30/09

9/30/10

9/30/09
 
Power Generation Systems $ 369,032 $ 389,638 $ 1,201,127 $ 1,389,212
Government Operations 265,090 259,752 785,516 778,254
Adjustments and Eliminations   (1,357 )   (393 )     (2,994 )   (1,347 )
 
  TOTAL   $ 632,765   $ 648,997     $ 1,983,649   $ 2,166,119  
 

SEGMENT INCOME:
 
Power Generation Systems $ 20,391 $ 34,202 $ 69,526 $ 136,199
Government Operations   48,108     19,798       134,574     123,023  
68,499 54,000 204,100 259,222
Corporate (3,422 ) (7,882 ) (14,622 ) (27,229 )
  OPERATING INCOME $ 65,077   $ 46,118     $ 189,478   $ 231,993  
 

EQUITY IN INCOME (LOSS) OF INVESTEES:
 
Power Generation Systems $ 7,123 $ 4,565 $ 19,123 $ 7,709
Government Operations   9,863     9,081       29,317     26,435  
 
  TOTAL   $ 16,986   $ 13,646     $ 48,440   $ 34,144  
 

PENSION EXPENSE:
 
Power Generation Systems $ 17,180 $ 16,694 $ 49,153 $ 47,418
Government Operations 14,142 13,347 37,510 37,664
Corporate     (482 )   5,012       8,915     14,182  
 
  TOTAL   $ 30,840   $ 35,053     $ 95,578   $ 99,264  
 

DEPRECIATION AND AMORTIZATION:
 
Power Generation Systems $ 6,586 $ 4,444 $ 16,727 $ 13,398
Government Operations 11,233 16,866 32,359 38,417
Corporate     1,784     940       3,914     2,375  
 
  TOTAL   $ 19,603   $ 22,250     $ 53,000   $ 54,190  
 
RESEARCH AND DEVELOPMENT, NET $ 17,424   $ 12,593     $ 50,709   $ 33,120  
 

CAPITAL EXPENDITURES:
 
Power Generation Systems $ 3,513 $ 5,030 $ 11,486 $ 25,201
Government Operations 4,282 11,710 25,438 25,707
Corporate     9,302     9,662       11,859     15,747  
 
  TOTAL   $ 17,097   $ 26,402     $ 48,783   $ 66,655  
 

BACKLOG:
 
Power Generation Systems $ 2,021,316 $ 2,061,837
Government Operations         2,338,117     2,539,252  
 
  TOTAL    

 
   

 
    $ 4,359,433   $ 4,601,089  

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