Babcock & Wilcox Co. ( BWC)

Q2 2011 Earnings Call

August 9, 2011 8:30 AM ET

Executives

Michael Dickerson – VP and IR Officer

Brandon Bethards – President and CEO

Mary Salomone – SVP and COO

Michael Taff – SVP and CFO

Analysts

Joe Ritchie – Goldman Sachs

Andy Kaplowitz – Barclays Capital

Tahira Afzal – KeyBanc

Will Gabrielski – Gleacher

Steven Fisher – UBS

Bryce Humphrey – BB&T Capital

Scott Levine – JP Morgan

Chase Jacobson – William Blair

John Rogers – D. A. Davidson

Martin Malloy – Johnson Rice

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to The Babcock & Wilcox Company Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will conduct a question-and-answer session, and instructions will be given at that time.

I would now like to turn the call over to our host, Mr. Michael Dickerson, B&W’s Vice President and Investor Relations Officer. Please go ahead, sir.

Michael Dickerson

Thank you, Kim, and good morning, everyone. Welcome to The Babcock & Wilcox Company’s second quarter 2011 earnings conference call. I’m Mike Dickerson, Vice President and Investor Relations Officer at B&W.

Joining me this morning are Brandon Bethards, B&W’s President and Chief Executive Officer; Mary Pat Salomone, Chief Operating Officer; Mike Taff, Chief Financial Officer and James Canafax, our General Counsel. Many of you have already seen a copy of our press release issued last night. For those of you that have not, it is available on First Call and on our website, at babcock.com.

During this call, certain statements we make will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our Annual Report on Form 10-K, and quarterly reports on Form 10-Q on file with the SEC, provide further detail about the risk factors related to our business. Additionally I want to remind you that except as required by law, B&W undertakes no obligation to update our forward looking statements to reflect events or circumstances that may arise after the date of this call.

Also on today’s call the company will provide non-GAAP information regarding certain of its historical results. To supplement the results provided in accordance with GAAP and it should not be considered superior to or a substitute for the comparable GAAP measures. B&W believes the non-GAAP measures provide meaningful insight into the company’s operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods and assist them in understanding B&W’s ongoing operations.

A reconciliation of these non-GAAP measures can be found in a second-quarter earnings release issued last night and in our company overview presentation posted on the Investor Relations section of our website at babcock.com.

The format for today’s call, we will begin with remarks by Brandon about the status of charges reported, safety and current business conditions. Second, Mary Pat will take you through the performance of each of our business segments, followed by Mike who will provide some additional financial details about the quarter. Finally, Brandon will conclude with some comments about the status of our major initiatives, followed by a question-and-answer period.

Due to the number of participants on today’s call, I would ask that you limit yourself to one question and perhaps one follow-up. You are; of course, welcomed to get back in the queue.

With that, I will now turn the call over to Brandon.

Brandon Bethards

Thank you, Mike and good morning everyone. Let me begin by highlighting the strong results in a few of our business lines which allowed us to report better than expected results while simultaneously absorbing an additional charge related to the Nuclear Energy Project we highlighted in the first quarter.

Operating income in both our Nuclear Operations and Technical Services segments are near record levels for the second quarter, as a result of improving productivity and manufacturing and the addition of several new MNO contracts over the last few quarters. On another positive note I am pleased to report to you that the processing and the material that resulted in the majority of the first quarter charge at NFS or Nuclear Fuel Services has been completed without any material change to the revised cost estimate.

Also I’m pleased to report that the company successfully negotiated a settlement related to the acquisition of NFS resulting in an increase in operating income and cash during the second quarter of 2011 of approximately $10.9 million. I should point out that even without the favorable adjustment, the NFS was accretive to the company’s operating income based on its strong operating performance in the quarter.

On a less positive note, you may recall from the first quarter, the company recorded a loss on a certain nuclear energy project. In our last conference call, we indicated confidence that we had a handle on the cost to complete and the issue was contained to the first quarter. That obviously did not happen. It is unfortunate that certain unknown and undisclosed conditions at this site required the company to take extensive measures beyond the original scope of work to complete the project. Additionally as this project shifted from the demolition phase to the reconstruction phase later in the second quarter, the company encountered a series of unexpected conditions resulting in its schedule extension leading to incremental estimated cost to complete.

As of today, the remaining scope of work to be completed on this project is the final structure welding, which is proceeding according to plan. From an accounting perspective, second quarter operating results included an additional charge of $26 million representing the gross estimated incremental cost to complete. There have been no offsetting claims or equitable adjustments included in the results for the second quarter.

However, let me assure you with claims and equitable adjustments that are currently in process are significant in value and maybe realized over time. The company intends to recover all other costs which we are contractually entitled. Finally, the company has thoroughly reviewed its backlog and determined that there are no other nuclear projects of this nature on a fixed price basis.

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