BWX Technologies Inc (BWXT) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Babcock & Wilcox Company third-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will conduct question-and-answer session. Instructions will be given at that time.

I would now like to turn the call over to our host, Ms. Jenny Apker, B&W's Vice President, Treasurer, and Investor Relations. Please go ahead.

Thank you, Steve, and good morning, everyone. Welcome to Babcock & Wilcox Company's third-quarter 2012 earnings conference call. I am Jenny Apker, Vice President, Treasurer and Investor Relations at B&W. This morning, joining me are Jim Ferland, B&W's President and Chief Executive Officer; Mary Pat Salomone, Chief Operating Officer; and Tony Colatrella, Chief Financial Officer.

Many of you have already seen a copy of our press release issued last night. For those of you who 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 -- our quarterly report on Form 10-Q and our annual report on Form 10-K are on file with the SEC, and 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 any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Also, on today's call, the Company may 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 as 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 to assist them in understanding B&W's ongoing operation.

A reconciliation of these non-GAAP measures can be found in our third-quarter release issued last night, and in our Company Overview presentation posted on the Investor Relations section of our website at babcock.com.

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, welcome to get back in the queue.

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

Thanks, Jenny. Good morning, everyone. There is a lot to talk about on the call this morning, so let's get to it. First of all, we are pleased to report the eighth consecutive quarter-over-quarter growth in consolidated revenue for the Company. Consolidated revenues were $807 million in the third quarter, an increase of 14% compared to the prior-year third quarter. Revenue was up year-over-year in three of our four segments, demonstrating continued strength in our core businesses. Consolidated operating income for the third quarter of 2012 was $67.3 million, compared to $57.6 million in the third quarter of 2011. Backlog is up 17% from Q3 last year.

Bookings of $538 million in the third quarter of 2012 were down 26% from the prior-year period, primarily as a result of lower bookings in the Power Generation segment. We have said that bookings this year in that business unit will be variable, and they continue to be. Year-to-date bookings in 2012 exceeded $2.5 billion compared with $1.6 billion for the first nine months of 2011, an increase of 58%. The Company generated $0.34 in consolidated earnings per share, which includes a net $0.03 per share negative impact from nonrecurring items. This compares to earnings per share in the third quarter of 2011 of $0.39. Tony will provide more details on this in a few minutes.

We continue to experience growth in our Power Generation segment. Year-to-date revenues are up more than 18% compared to last year, and backlog is 44% higher than it was a year ago. That said, our projections for additional acceleration in growth and margins has been tempered a bit. Changes in the regulatory landscape, low natural gas prices, and the sluggish economy have dampened somewhat the expected rate of growth of our environmental business. But we still see tremendous opportunity. Utilities continue to operate coal-fired plants that require the environmental equipment and services that B&W provides. We now expect that the timeframe over which this work will be spread will be longer than the three to four years originally forecast -- with the current environmental cycle, now expanding potentially to a six or seven-year period.

One of the consequences of stretching out the cycle is a more competitive landscape in the near-to medium-term. As a result, we are not seeing the margin improvement that we had expected to see. Operating margins historically have been in the 7% to 10% range. And that is where we expect them to stay in the near-term, although perhaps in the lower half of that range for the next couple of years.

Executing projects flawlessly will remain a priority; giving us the ability to capture contingencies and reclaim warranty reserves, which will enable us to drive margin improvement going forward.

Safety remains an area of great importance, and we are proud of our safety record. Overall, for the first nine months of the year, the Company is reporting a total reported injury rate that is 25% better than our strong 2011 performance.

I am now going to move away from Q3 results. As I said we would, shortly after I joined the Company last spring, we have been evaluating ways to improve shareholder returns and unlock value within our balance sheet and our businesses. During the third quarter, significant progress was made on several key initiatives that focus our strategic vision, improve our profitability, and drive shareholder value for the long run.

As you're aware, the Company's large pension obligations have consumed considerable cash and burdened earnings for the past several years. Three important decisions have been made this quarter with respect to our pension plans.

First, we've notified participants in our various active salary pension plans that effective December 31, 2015, these plans will be frozen. This three-year notice gives our long-tenured employees who participate in these plans time to anticipate and make changes to their individual retirement financial planning.

Second, we have elected to use the liability valuation option provided in the MAP-21 legislation to calculate our annual pension funding requirement. This change will significantly lower required cash contributions to the pension plan for the next couple of years.

And, third, in the fourth quarter this year, the Company will adopt mark-to-market accounting for our pension and post-retirement benefit plans. This change will result in simpler and more transparent financial reporting. It will reduce net periodic pension expense in 2013 and for the next several years by $70 million to $80 million per year, because we will no longer be amortizing in current year's earnings actuarial losses associated with previous years. However, in the fourth quarter of every year, we will recognize the actuarial gain or loss resulting from differences in actual performance compared to plan assumptions.

Aside from the pension decisions, we continue to evaluate various options and opportunities to fund the development of our mPower small modular reactor technology. We have concluded our evaluation, vetted our strategic plan, and are moving into an execution phase. Over the coming months we will accelerate discussions with a number of potential strategic partners in an effort to broaden the depth of our technical team; enhance access to key international markets; and attract additional equity participation to help fund the development program, while still maintaining control of our intellectual property and key scopes of work.

The Company is still awaiting news of the DOE's small modular reactor cost share award. And we remain optimistic that we will be one of the two companies that will be chosen to share in the $452 million in grant money earmarked for this program. With this in mind, we continue to assess the appropriate rate of spending by B&W, recognizing the need to carefully balance spending obligations, program milestones, and development criteria with our focus on sustained earnings growth. Our efforts to add additional mPower partners will provide additional flexibility in this regard going forward.

Last quarter, I told you we had launched a global competitiveness initiative to enhance profitability and shareholder returns. The team managing this project continues to make meaningful progress, conducting detailed evaluations of our business units' efficiency and organizational structures. As planned, we will be in a position to give better guidance as to the size and scope of the opportunities, along with the associated implementation costs, during the first quarter. We expect to begin realizing these savings the first half of next year.

Finally, I'm pleased to announce that B&W has approved the initiation of a quarterly dividend for its shareholders, and a $250 million two-year share repurchase program. The combination of a dividend and share buyback program reflects both our confidence in the Company's long-term financial strength and our commitment to deploying capital to maximize shareholder value. The first quarterly dividend of $0.08 per share will be payable on December 17 to shareholders of record as of November 19. On a full-year basis, the dividend is targeted at $0.32 per share. It will be the first dividend paid by B&W since it became a public company in August 2010.

B&W also authorized a two-year share repurchase program of $250 million. As a first step, we plan to buy back approximately $100 million worth of stock by the end of the first quarter 2013, via open market share repurchases. Share repurchase activity after that will depend upon share price, market conditions, continuing evaluation of attractive growth initiatives, and other considerations.

We remain focused on growing our business, both through organic investment and strategic acquisition. The Company routinely evaluates external growth opportunities that leverage our core competencies and allow us to create significant synergy value. Our dividend and share repurchase programs are sized to allow us to invest in these opportunities while maintaining ample liquidity and flexibility in our capital structure.

Before I turn the call over to Tony to discuss the segment results and several other financial matters, I want to address our situation at the Y-12 DOE site. Over the summer, there was a security breach at the Y-12 facility Oak Ridge, Tennessee. Since the event, B&W has taken responsibility for the corrective actions, changed the leadership team, and made significant improvements to processes and physical equipment. We've also terminated the site security contractor and integrated the security contract in to our M&O contract.

As you know, the NNSA is completing the combined management -- is competing to combine management and operations of Y-12 and Pantex, which are currently managed under two separate contracts. A revised bidding process has delayed the timing for the award of this contract. Accordingly, we are not able to predict the timing of the award for the combined contract or the impact of the security breach on our team's bid. In the meantime, B&W continues to operate both the Y-12 and Pantex sites, including the integrated security contract under a series of one-month extensions.

With that, let me turn the call over to Tony, who will take you through the results of each of our business segments and other financial matters.

Thanks, Jim. Jim mentioned the consolidated performance for the quarter, so let me start by walking you through the segment results. Revenues in the Power Generation segment for the third quarter of 2012 were $426.4 million compared to $385.3 million in the third quarter of 2011, an increase of 10.7%. This growth in revenues was driven by an increase in new build environmental projects; particularly scrubbers, and particularly control devices, as well as biomass and waste-to-energy new build power generation boiler systems.

Revenues from environmental systems increased 48.9% in the third quarter of 2012 compared to 2011; while new build steam generation systems, primarily from the renewables markets, increased 18.4%. Revenues from aftermarket services, which include service projects, were down 11.7% in the third quarter primarily due to fewer large construction projects in 2012 than in the prior year.

Operating income in the Power Generation segment, which includes equity income of our global joint ventures, was $30.4 million in the third quarter of 2012 versus $38.9 million for the third quarter of 2011, a decrease of 21.9%. The year-over-year decrease in operating income was primarily due to more competitive profit margins from early cycle environmental projects; cost overruns on a couple of specific large projects; and lower equity income, as anticipated, from the Company's joint venture in China, due to the timing of new build boiler projects.

Backlog in Power Generation was $2.5 billion at the end of the third quarter 2012 compared to $1.7 billion a year ago, attributable to the strong environmental orders reported over the past year, and booking of the West Palm Beach waste-to-energy project in the first quarter of 2012. Notably, since the CASPR ruling was announced, there has been only one minor $10 million project removed from the backlog as a result of the regulatory change.

Bookings in the Power Generation segment in the third quarter were $385.6 million, a decrease of 40.9% compared to the third quarter of 2011. Environmental bookings during the third quarter were $134.3 million, an increase of 24.9% compared to the third quarter of 2011. Bookings for the new build steam generation systems were $107.3 million, significantly lower than the same period last year. This decrease primarily reflects two large bookings in the third quarter of 2011 -- one, a biomass EPC project in the United States; and the other, industrial boilers for a Canadian oilsands project. We anticipate strong fourth-quarter bookings within the Power Generation segment.

Nuclear Operations, which reported record revenues of $284.5 million in the quarter, increased 11.8% from the third quarter of 2011. Nuclear Operations operating income was $51.9 million in the third quarter of 2012, a 36% increase compared to the third quarter of 2011. The operating margin in the quarter was 18.3% compared to 15% in the third quarter of 2011, due to higher shop volumes and productivity savings which we share with the customer. Backlog in Nuclear Operations at the end of third quarter was $2.6 billion. Recall that the segment typically books majority of its annual awards in the fourth quarter of the year, correlated to the annual budget cycle of the US government.

Nuclear Energy segment revenues were $75.0 million in the third quarter of 2012, a 22% increase compared to revenues of $61.5 million in the third quarter of 2011, reflecting both a large nuclear equipment manufacturing contract and several nuclear services projects completed or nearing completion in the quarter. As a result, as a reminder, the Nuclear Energy segment operating loss of $18.6 million in the quarter included R&D and SG&A related mPower costs of $27.6 million; of which $4.7 million was non-cash, non-deductible, in-kind R&D expenses incurred by the minority partner of generation mPower, and consolidated on the books of B&W.

A $37.5 million segment operating loss reported in the third quarter of 2011 included $10.6 million of non-cash, non-tax-deductible, in-kind R&D reflecting a year-to-date catch-up adjustment booked in that quarter. B&W mPower's cash R&D expenditures in the third quarter of 2012 were $17.1 million compared to $20.6 million in the prior-year quarter. Poor Nuclear Energy operating profit of $9 million in the third quarter of 2012 compares to a loss of $4.6 million in the third quarter of 2011.

Technical Services segment revenues in the third quarter 2012 were $26.0 million, a decrease of $2.6 million versus the third quarter of 2011, due primarily to lower revenue from the American Centrifuge Project, and from unusually high international contract support services in the third quarter last year, resulting from the Fukushima disaster. Operating income of $11.3 million represents a decrease of $9.4 million in the third quarter of 2012 compared to the third quarter of 2011. This decrease in operating income is due primarily to expenses associated with a bid and proposal cost related to the Y-12 Pantex rebid and to our estimation of lower fee income at Y-12.

Now let me touch on a few balance sheet tax matters and cash flow. We recognized a total of $29.6 million of non-cash impairment charges this quarter, which included a $27 million write-down of our investment in USEC preferred stock from $46.6 million to an estimated fair value of $19.1 million. This loss created no tax benefit. We were required to evaluate the fair market value of this investment following actions by the major rating agencies to lower USEC's greater credit rating. This accounting charge in no way diminishes our commitment to the American Centrifuge Program for which we manufacture components and provide technical support, or to the recovery of the full value of our investment.

Our effective tax rate for the third quarter was 2.7%. This unusually low rate is primarily due to the recognition of 25.4 -- $25.3 million of previously unrecognized tax benefits, following expiration of the statute of limitations in certain jurisdictions. These tax benefits, which related to transfer pricing issues and the deductibility of bond redemption costs, were assumed by B&W at the time of the spin. They were previously treated as uncertain tax positions.

On a pro forma basis, excluding the recognition of these tax benefits and adjusting for the USEC impairment charge, for which no tax benefit was recognized, our third-quarter effective tax rate was 39.7%. This compares to an effective tax rate of 34.3% in the second quarter of 2012. The higher-than-normal effective tax rate in the third quarter was primarily due to unfavorable true-ups of our US and Canadian 2011 tax returns. We expect our full-year effective tax rate, on a normalized basis, will be in the range of 33% to 35%, assuming reinstatement of the R&D tax credit that expired last year.

As Jim mentioned earlier, earnings per share for the third quarter of 2012 was $0.34 compared to $0.39 in the third quarter of 2011. After adjusting for the impact of the impairment charges and the recognition of the previously unrecognized tax benefits, EPS for Q3 2012 was $0.37. In addition, the impact in the quarter of the higher-than-normal effective tax rate adversely impacted third-quarter earnings per share by approximately $0.03 to $0.04.

Net cash decreased by $15.7 million, reflecting the use of cash primarily associated with a $44 million cash tax payment in the third quarter and increased working capital needs, including timing of cash receipts on certain contracts as well as the timing of raw material purchases. The fourth quarter is typically a period of exceptionally strong positive cash flow, and we expect this to be the case again this year.

Let me now turn the call back over to Jim for some final remarks.

Thanks, Tony. Let me wrap up again by stating that we remain confident in our baseline business, as demonstrated by the dividend and stock repurchase programs we announced this quarter. We are also executing on a number of other initiatives designed to increase long-term profitability and enhance shareholder value. We have restructured our pension plans to contain our exposure to the long-term liability, while taking the necessary steps to reduce near-term cash contributions and lessen the drag on earnings.

We are carefully managing our R&D investment in mPower, as we await news of the DOE SMR cost share award. And we are actively pursuing strategic partners who can enhance the development and commercial success of this program, as well as provide additional resources and investment dollars. The global competitiveness initiative is on schedule to produce meaningful cost savings throughout the Company in 2013 and beyond.

To sum up, we have a lot of positive momentum heading into 2013. And while challenges remain, we have a sound strategy and a talented team committed to growing our business and enhancing shareholder value.

That concludes our prepared remarks. I will now turn the call back over to the operator who will assist us in taking your questions.

(Operator Instructions). Brian Konigsberg, Vertical Research.

Good morning. So there's a lot to hit here. Maybe I'll just start on just the capital allocation. So you guys have been talking about this change in strategy for the last couple of quarters; but I'm just curious, could you walk through what the triggers were? It does seem like you're going to have a lot more deployable cash next year through pension contributions, maybe lower JV contributions, and potentially some of the DOE funding. Maybe could you just talk about the process you guys went through; and maybe the magnitude, to the extent you can, as far as what these cash tailwinds are going to be in '13 and beyond?

I'm going to ask Tony to lead that, and I think I'll follow up.

First off, let's say that, as Jim has mentioned in the last call, we have been -- we embarked on, as we do each year, a strategic process and had an off-site with our Board to discuss a number of different initiatives during the third quarter. And as part of that process we took a very hard look at our operating earnings and our cash flow projections for next couple of years. And having done so, and recognizing that there is -- was an opportunity to take our balance sheet and leverage it -- and not in the literal sense, but more in terms of our ability to use our strong balance sheet to initiate a share repurchase as well as a dividend program.

And with that mind, we sized it, really, to ensure that the Company retains the flexibility in terms of our liquidity and capital structure. Not only, obviously, to fund these new programs, but also to aggressively fund organic growth and pursue strategic acquisition opportunities, while providing meaningful return of capital to our shareholders; not only through the initiation of a dividend, which we expect and hope and expect to increase over time, and initiating a meaningful share repurchase program that we think will move the needle.

Really it is a combination of all the above. And to the other half of your question specifically, in terms of tailwinds -- yes, you are correct. We do anticipate significantly lower pension funding requirements next year. We are also carefully monitoring our spend, obviously, on the mPower program. And putting that all together, we felt and believe we will have substantially stronger cash flow in 2013 and 2014 than we have seen this past couple of years, and felt very comfortable with initiating these programs.

Do you want to add anything, Jim, to that?

Not much. I'll reiterate a little of what Tony said. Certainly, it's a balanced decision. We want to make sure we have enough flexibility in our capital structure to be able to execute on some strategic growth opportunities that we do see out there in the marketplace. At the same time, when we take a look at our business, we have a couple of very solid predictable businesses. And it makes an awful lot of sense to tie a dividend program in with that, and we're very comfortable.

Even after that, we do have excess cash. Outside the amount of money we want to retain to pursue their strategic growth options, there's also $250 million stock repurchase, of which we're going to do $100 million in the next four or so months. So it's a balanced decision. We'll take a look at what the numbers look like second quarter next year; we'll take a look at our strategic growth opportunities that are out there. And then we'll decide on the timeline for the remaining $150 million in the stock repurchase program.

That makes sense. Just to follow on, maybe to just hit a little bit more on that power -- the Power Generation operating margins, talking about the low end of the 7% range in the near to medium term. So it seems like that, even prior to environmental ramping up, you are at the high end; it seems like, environmental, you're expecting to be a drag on earnings now, whereas you thought it would actually be a gain to profitability going forward. Could you talk about the dynamics, as far as how much of that is actually contributing to the low end versus, say, [coal] aftermarket activity going on?

A lot of different questions in there. Let me see if I can hit on some pieces of that. First of all, on the environmental side, in our PGG business unit -- we still expect that to grow significantly. And we expect it to contribute positively to earnings; not be a drag. So we still expect good things on that. And we expect it to help drive revenue growth, and growth in earnings inside PGG. That said, we think it's probably going to spread out a little bit more than we originally anticipated, and probably look something like a 6- or 7-year life cycle as opposed to 3 or 4.

As a result of that -- and given that it's a pretty competitive environment we work in, although we do have some competitive advantages out there -- we are predicting margins in the 7% to 10%10% range, probably at least in the next year or two, on the lower half of that 7% to 10% range. So still good new work, but maybe 7% or 8% as opposed to 9% or 10%. Now when we give that range of 7% to 10%, that's outside -- that's looking at PGG in an isolated fashion, independent of our GCI effort, global competitiveness, and the changes in pension. So those two could help improve the margins. But we were trying to give you a more apples-to-apples look at PGG when we use the 7% to 10% range.

Got it. Thank you very much.

Tahira Afzal, KeyBanc.

Thank you. Good morning, everyone. I guess the first question is in regards to the small issues you did have on the [Power] side. Could you provide a little more color on that? And should we be assuming that you're going to continue to see, on and off, these type of small hiccups? And should we be factoring that in, given your [fixed price sharp] on that side of -- are there sort of measures being put in place to present better execution going forward?

I'm happy to address that. We did have two projects in particular in the PGG business unit this quarter that impacted earnings in the range of $10 million. One of those projects is now complete, so it's done. The second project is a little bit more than 50% complete, and it will take several more months to work through that project. That said, there is contingency left. And we are relatively comfortable that we have our arms around the issues, both on from a cost and a schedule perspective. And I can tell you it certainly has the attention of the management team, that project. So it's not necessarily without risk. But we feel pretty good about where we are on that project today.

In regard to your question about should we continue to expect kind of project hits going forward, our intent is to minimize those as much as we possibly can. We are taking a look back at our project execution model in PGG. When you actually look at the root cause of these two problems we had this quarter, it was actually a bidding problem as opposed to an execution problem. So we're going back in and taking a look at the bidding process, to make sure that we are comfortable and that our bids are all-inclusive before we start. So we certainly do not expect to see project hits, going forward, of this magnitude. Certainly, there will be small ups and downs in the business, but we wouldn't expect to see this again, or to see this be a repetitive problem for us.

As a general statement, Tahira -- this is Tony -- our experience has been that we have typically, because we are fairly conservative as a general rule, we usually have net favorable contract re-estimates. And we did have a favorable re-estimate within the quarter in the normal course. But these two projects were clearly outside of the norm. And so that's why we're bringing them to everyone's attention.

Got it. Okay. My follow-up is -- Jim, clearly mPower represents a very notable and material to the growth driver in the longer term for PWC. But now with the push out on the environmental side, or rather to set a [small ran] -- you mentioned growth strategy to really -- maybe, perhaps, it produced a little more cyclicality. Could you give us a little more color into what type of opportunities and strategies you're looking at?

Sure. Let me make two comments. You mentioned mPower, so let me address that. And I'll talk a little bit about longer-term strategic opportunities that we see. On the mPower front, we are -- we continue to wait for the DOE award. We hope that's going to be in the next month or two, but it's a little bit difficult to predict. We do anticipate something moving on that, now that the elections are over. And we continue to try to manage down, as much as we can, the amount of money we put into mPower. We're trying to balance the development needs, schedule and licensed the middle to the NRC. And we are trying to do that at minimal cost to us.

One of the strategic decisions we have come to is, it's important for us to find a way to add some additional partners or equity partners at mPower going forward, that might be able to help a little bit on the technology side; give us access to some of the key markets, especially international markets that we think we are going to have to be successful in with mPower; and then also to help leverage down the spending on mPower for us. That's not something that's going to happen in two or three months. But it is something that we should be able to have our arms around in the next 12 to 24 months for sure.

Switching topics a little bit to the broader strategic growth side, as we have said -- I, and, I think, we, the management team -- really like the four business units that we have today. Solid performers; PGG with some solid growth opportunities. And the other businesses, just good solid performers, both on the operating income and on the cash side. That said, PGG by itself, it's a pretty big task to carry -- to be the sole growth engine for B&W. And we're clearly going to be looking outside for ways to leverage some of the core competencies of the business.

We're really good at technology. We are very good manufacturers. We are very good at running big, large complex projects, primarily in the power sector. And we have strong relationships with the government. And we are going to be looking to leverage those core competencies going forward, with some targeted acquisition opportunities. And I think we have left ourselves plenty of room, with the dividend and the share repurchase program, to do that going forward.

Thank you, Jim. That was very helpful.

Jamie Cook, Credit Suisse.

This is Andrew Buscaglia on behalf of Jamie Cook. Thanks for taking my question. Just a quick question just to follow up on the mPower commentary. Can you just quantify -- I mean I think in the quarter, could you just clarify the expense in the quarter, and then I think you said $27 million or so. And then can you update us on what you think about costs going forward, if there's any update there?

Andrew, I missed the very front half of your question. This is in regard to which?

This is in regard to mPower.

mPower.

Yes.

He's asking about if there are any costs related to mPower, which were in my script. Let me just refer back to them.

Go ahead. Tony is going to take the front end of that.

Okay, Andrew, so what we said was that if we had R&D and SG&A-related mPower costs of $27.6 million in the third quarter of this year, that number included $4.7 million of non-cash in-kind R&D, which is incurred by the minority partner, our minority partner in Generation mPower, but consolidated on the books of B&W since we have a controlling interest. That compares to -- what was the number last year? I don't have that number right at my fingertips.

It's right here, $32 million.

$32 million, thank you. That compares to $32.7 million last year, and that number last year included $10.6 million of non-cash in-kind R&D. Because it was a catch-up adjustment in the prior year, effectively we only started consolidating our minority partner share of mPower, their in-kind R&D as of the third quarter of last year. Thus, the number was larger.

Okay.

Let me just see if I can give you a little bit more, Andrew, on that. In 2012, we are estimating we'll invest a little over $110 million in mPower. In 2013, I would anticipate that number is certainly no higher than that, and could well be a little bit lower than that. It depends on timing of the DOE award, our ability to bring in other partners and then just what the overall milestones look like on the project.

Okay, that's helpful. And then just again, like I know you've talked a little bit about your outlook on the environmental side. Can you also talk about -- I know it's a little bit longer term in terms of -- I don't know how much you want to talk about '13 yet, but on your nuclear operations side, just kind of your thoughts over the next year or so.

I'll take that on NOG. We've talked already a little bit about NOG. It's a very, very solid business for us. It is actually performing well both in terms of the quality of the products that we are delivering to our customer, and in terms of financial performance. And we would expect NOG to stay relatively flat going forward.

Which is at near record levels.

Flat in a good sense, but nonetheless not a big growth opportunity, but still just a rocksolid business for us. (multiple speakers).

We've already gotten to the two year on the Virginia class, so really expect to just continue to sustain that.

Right.

That's helpful. Thanks, guys.

Andy Kaplowitz, Barclays.

Good morning, guys. This is Alan Fleming standing in for Andy today. How are you? I want to start with a question around the performance in your Chinese joint venture. Has that business troughed in earnings, and can you talk about it and can earnings continue to improve there next year?

I think the short answer is there has been a decline in the earnings for the JV, the Chinese JV, which we have been -- we've indicated to you all as early back as the beginning of our conference call from Q4 last year. And the reason was just really where they are in the cycle in terms of booking new orders.

One of the encouraging signs is we've seen several significant orders booked in the last six months' time, so effectively they have rebuilt the backlog and it's actually back up near where it was the last peak. The question that still has to be answered though is a lot of those projects still require a government approval in order for them to physically get kicked off, and that's been a little bit slower than we would've liked, but again the backlog has really gone up the better part of $500 million from where it troughed.

So the long and short answer is we expect improvement next year. We won't be back to the earnings levels of a year ago when we were finishing up a number of very profitable projects, but we certainly see steady improvement throughout 2013.

Alan Fleming; Okay, thanks for that, that's helpful. And then as a follow-up, could you quantify the impact that the Y-12 security issues had on your Tech Services earnings this quarter? And is this more of a one-time hit or should we expect a lower run rate of fees going forward? Thanks.

So we reduced -- it resulted in a $2.5 million decrease quarter-over-quarter was the impact this year -- this quarter. We do not have our 2000 -- government 2012 earnings yet from the government. There is a fee process that has gone through where there is a determination of the fee to be awarded. That will occur in the latter part of the fourth quarter. And so there is definitely subjectivity in the measurement of performance and the NNSA could arrive at a score that's different than the fee that we have estimated. So that score with regard to 2012, we made an estimate and we'll see where that comes out.

With regard to 2013, if we win the contract, the fee is projected to be lower than based on the fee pool, will be lower and as we have a lower percentage of the ownership, and there's clearly government spending pressure there that is impacting the spend there.

The other piece within the quarter was there were also rebid costs that were not -- they are reasonably significant related to the Y-12 rebid. That's the normal process. These are typically anywhere from eight to ten-year contracts, and so you basically have to put a lot of upfront money, if you will, into the rebid, and of course, it is not recoverable if you lose the bid and it's a period cost within the period incurred. And that also impacted Q3 results for the TSG segment.

Okay. Very helpful, guys. Thank you very much.

Bob Labick, CJS Securities.

Good morning. First, just wanted to follow up quickly on the NOG segment. You had record revenues and earnings in the quarter and then the backlog suggests $300 million revenues in Q4 as well, which would be a record. So when you say flat, Q1 was $250 million, Q4 is going to be $300 million. What's driving the growth in this and is it sustainable, or how should we -- what's the range we should look at in terms of flat at high records?

My take on that is the revenues are going to move around a little bit in that business just based on the volume of work that's actually flowing through the shop and the number of man hours we can put on different pieces of equipment. That said, the overall profile for NOG, as Mary Pat mentioned before, is we've now ramped up to two Virginia class subs a year and we are on a pretty steady path on the carriers. So you can average those together probably and that's essentially where NOG is going to be over time.

Obviously we continue to watch for the potential impact of sequestration. We think our NOG business, given that we supply high-end equipment for subs and carriers for the Navy, is in a pretty good position regardless of what happens with sequestration. Whether it gets kicked down the road or whether there is some sort of action taken, we feel pretty good about that on the NOG side of the business. That said, we are obviously watching it closely.

Okay, great. And then my follow-up, if you could perhaps give us an update on the progress on your joint venture facility in India, and then also just more globally discuss the size of the market opportunity for B&W from that new JV please.

In terms of the Indian joint venture facility, the facility is progressing very well, and it is actually almost complete. We expect that it will, in the first quarter of 2013, should be complete and ready to go. Unfortunately, there is -- we don't have an order to put into that facility yet because of the ongoing kind of overall slowdown, I would say, in the Indian market with regard to just orders being awarded. There are multiple things that impact orders being awarded there -- land, coal, allocations, a lot of different factors there that are impacting that. And so that has resulted in generally the orders moving out in time and in terms of awards. We are working very hard to get the first order. We are looking at other potential ways to get work into that shop from the two parent companies, and we are continuing -- we continue to believe that long term that there is a market there.

Okay, thank you very much.

Steven Fisher, UBS.

Good morning. Just on the pension, how would that $70 million to $80 million be allocated across the segments? Would that be in line with the -- or proportional to the existing pension expense? And then I know you mentioned the expected tailwinds from the MAP-21, but can you help us quantify what the cash flow tailwind would be? And then longer term what the earnings tailwind would be from the 2015 plan freeze.

Okay, I'll try and take a whack at the three questions. Regarding -- let's start with the MAP-21. Regarding the MAP-21 legislation, we would expect next year to save -- to have our funding requirements drop by approximately -- somewhere in the neighborhood of $100 million year-over-year. That number is less than 2014 and it has to do with the formula the government is using to allow this as a temporary measure to relieve funding. And then kind of back on track, spendingwise roughly by 2015, '16, okay, timeframe. But over the next couple of years, we would expect to save well north of $100 million and a large chunk of that will be in 2013 as I indicated.

In terms of how that cost gets spread between the segments, largely what you said is true. It will follow the pension expense. Broadly speaking, 40% plus of the savings will show up mostly in the NOG segment because it's the largest part of our government side of our business. And then the remainder will be reflected -- the savings will be reflected in the commercial segments, and obviously PGG is quite a bit larger than our commercial nuclear energy business. So that's where the bulk of that savings will be realized. What was the other --? Then in the longer term -- I'm trying to remember the third part of your question.

The impact of the earnings tailwind from the '15 freeze.

First of all, this program has been frozen to new entrants since 2006. If you didn't have five years of service -- these are our two domestic plans -- then you basically -- you weren't vested in the program and you reverted to a defined contribution plan. So only about half of our existing workforce is actually still in the pension plan here in the US. With the, if you will, permanent freeze at the end of 2015, which means these folks will no longer earn credit for service years or for increases in their salaries, that impact is much more modest because that's not what's been driving the bulk of our costs. So what we will see is we will see basically a portion, but not a large portion, but a portion -- a meaningful, but not a substantial portion of the roughly $40 million a year that we -- of service costs. That number will come down.

Recognize that's offset by a little bit of an increase in the contributions that we will make to these employees because they will switch from a defined benefit plan into a defined contribution plan. So there's a little bit of an offset there. This is more of a risk containment play, I think, than it is necessarily a direct earnings impact post-2015.

Okay. Just a quick follow-up, can you just clarify on the power execution, or I guess bidding issues, were these air-quality projects, and was the issue in construction or was it sort of in the manufacturing side?

Neither of the two projects was on the environmental side. And neither of them -- they both had to do with field execution as opposed to manufacturing.

Okay, thank you.

Rob Norfleet, BB&T Capital Markets.

Good morning. Just a quick question. I know you've discussed obviously being cautious on the ramp in the revenue side for environmental control equipment, but can you discuss maybe the impact that the CASPR rule being vacated had or is having as a result of this versus kind of some of the larger picture items like low nat gas prices? And can you also discuss have bids for environmental control equipment gone up since Q2, and what kind of visibility do you have in 2013, especially with MAP compliance in the next three years?

Let me start with the CASPR discussion. Interestingly, on the CASPR side, we really haven't seen much, if anything. I think Tony mentioned one $10 million project that actually came off of our bid list in regard to CASPR. So we really haven't seen any projects canceled. What we are seeing is the utilities just slowing down their decision-making, or slowing down the process of initiating the RFPs that are coming out on CASPR. So if you combine the delay in CASPR with just the overall pace of regulatory, that's where we come up with -- instead of this being a three or four-year cycle, maybe it looks like six or seven. The elections probably impact that a little bit, but not too much.

In regard to -- you either asked year-over-year or quarter-over-quarter on environmental bookings, pretty flat.

I think that's also true of the bids.

That's also true of the bids.

Okay. I guess my next question is, assuming we do hear from the DOE here in the next couple months, can you walk us through how we should view if you are appropriated a certain amount of money? How will that work, meaning will it be a direct offset to the existing R&D you're spending now, will it be more of a matching funds program? Just want to get a general idea of how we should be looking at that.

Fair enough. So again we anticipate a decision in the next couple of months, but we've been anticipating that for the last couple of months as well. And it was pushed off till after the election. We still feel pretty good about our position on that front. So after the award, there will be a period of time where we actually enter into a negotiation with the DOE to define the actual rules around this matching program. And that could take a few weeks to get through. After that, the government will, in some proportion, begin to match the spending we have.

Now in directly addressing your question about how much will it drop our own contribution, certainly not dollar for dollar. We have to maintain a certain pace of spending in the mPower program in order to meet some of these license submittal timelines and some of these [build] profiles for our first customer on the Clinch River site with TVA. So I would not expect a direct dollar-to-dollar or even close to a direct dollar-to-dollar reduction in our spending on the DOE program.

The real driver for B&W, the real thing that is going to take place that is going to drive down our spending over time is our ability to bring additional partners into the portfolio to take equity positions and reduce our 80% to 90% equity exposure. That's what's ultimately going to drive spending down in the future.

That's helpful, thank you.

Scott Levine, JPMorgan.

This is actually (inaudible) for Scott. So regarding the election results here, so what do you think more broad picture (inaudible) of the different spending outlook? I think a response to the question is certainly submarine. On the submarine side, you have taken care of and you are in production over there. How about the other possibilities?

Okay, so post-election impact. A couple topics that come to mind on that front. You mentioned NOG and subs. Again, on the sequestration issue, we feel pretty good about our position on NOG. We provide some very valuable equipment to the government, and I think regardless who is in office, that's recognized and subs and carriers remain kind of in the center of whatever military strategy the US is going to go forward with in the long run. We feel good about the NOG business. mPower has actually been very strong bipartisan support for small modular reactors in the US. So I don't think the election has any impact on that. Clearly, there will be a little bit of pressure on the funding for the $452 million, only a portion of which is available today. So that could feel some pressure, but I don't think the program as a whole is at risk and I don't think the election results really impacted that one way or another.

And then the last topic that comes to mind on the election is PGG and the pace of environmental regulation. As a general statement for B&W, as environmental regulation ramps up in the United States, it tends to generate more work for us, so long as those regulations aren't so stringent that it causes the utilities to want to shut down the plants and transition to gas. So perhaps with the President winning the election, the pace of regulation coming out of the EPA will probably remain similar to the last four years, and we expect that to drive growth in our PGG business unit on the environmental side. We don't expect it to ramp up to the point where it's going to cause any increased shutdown of the coal units. We think our original projections on that front are pretty solid. And again, we think we can continue to grow the PGG business domestically and internationally, but domestically in the case of this question under the President's next four years.

Okay, that's helpful. And as a follow-up, can you just talk more about the cost-savings initiative, the global (inaudible) program you talked about in the prepared remarks, if you can just clarify something on the details or the size of the savings you're targeting over there.

Sure, I'll talk a little bit about GCI. We are actively working on that; we're making good progress. We are just beginning to get our arms around what the real opportunities look like, and I would anticipate that, in the first quarter, we'll be able to have a better discussion with you around actual timing of the program and what a potential upside would look like and what a potential cost would look like to implement. So I'll come back to the same comment I made before. I continue to think there is material value in this going forward, and I think we will be prepared to have a good discussion with you in Q1.

Okay, that's helpful. Thank you, guys.

Will Gabrielski, Lazard.

Thanks, good morning. Can you just talk about through trying to find partners for mPower, maybe what you're looking for today in a partner that you weren't looking for say a year ago, and what type of traction you're getting through these conversations and potential equity participation? Thanks.

Sure, Will. I will say we are finding interest in various partners in talking to us about mPower. A couple of drivers for the interest. One is the general view in the marketplace, and I think this is accurate, is that we really do have a good technology on this front, and we're probably ahead of most of the other competitors that are in the field.

Two, there does seem to be a belief that there's a place for small modular reactors in everybody's portfolio going forward, both domestically and internationally. So we are getting interest. That said, we are really just entering into these discussions, so we'll have a better feel a few months from now and these are relatively complex discussions; they'll take a little bit of time. If anything has changed in the last year or so, it's the location of the market for small modular reactors. Originally, we were focused primarily in the US and perhaps in Europe with a little bit of upside from Asia. And I would say today it's at least a little bit different. I still think we have a significant market in the US and Europe, but the Asian market is even stronger going forward just given that that's where growth is today and that marketplace in general seems pretty open to the concept of SMRs.

So as we go forward, we would be looking for partners that can add technology value to us, obviously partners that have a relatively deep balance sheet and can fund their portion of the investment, and perhaps some partners that have some connections and might give us market access overseas would also be beneficial to us.

Okay, great. What's the expected timing right now of the Pantex Y-12 transition given that no decision has been made on a new contractor?

A little bit difficult for us to tell on the Y-12 Pantex. We'd expect a decision as early as the next month or two. That could change, that could change though. Going forward, it could delay out beyond that. Once that decision is made, you have the question as to whether there's going to be a protest period or not. That would be a few months if we went down that path, and then the transition itself is about four months at this point. So regardless of which of those sub- scenarios we pick, that pushes our existing Y-12 Pantex contract on a month-by-month basis into 2013. The question is is it one or two months or is it four, five or six months into 2013?

Okay. Just lastly, I guess for Tony, when you think about the balance sheet here, you guys did a lot this quarter. I think we all appreciate that. But I'm just wondering how leverageable do you view this business, and is that a decision that might be made after you get more clarity on SMR funding or whether you're successful with the DOE, or does it have to be like an M&A trigger for you to consider putting some debt on the balance sheet here?

Well, what I would say is that, first of all, there is room in our balance sheet for leverage, obviously. We do have -- on the one hand, we do have a pension liability, which obviously the rating agencies treat as equivalent to debt, but even with that said, there's still room for leveraging the balance sheet. But not for the sake of leveraging it, with a purpose in mind.

I'd say that, as a general rule, our view is that we would certainly leverage the balance sheet for a strategic acquisition, and we have left room to do that. Despite the announcements of today, we still feel we have plenty of capacity to do that. And what helps us a little bit is the fact that we have -- certainly half our business, the government side, is very predictable, the cash flows are solid. As I mentioned earlier, we have some tailwinds coming at us as well because our funding requirements for pensions will drop dramatically in 2013 and will still be lower than they are today in 2014. Although not quite as dramatic, it will be a slight increase in 2014.

So when you put it all together, we feel like we've got the flexibility and we see opportunities in the marketplace to consider acquisitions. Right now, that would be our focus I would say more than any other reason to leverage the balance sheet.

Okay, very helpful. Thanks, guys.

Martin Malloy, Johnson Rice.

Good morning. Could you talk about the demand you're seeing outside of China and India in the international markets for solid fuel boilers? You've had a couple press releases here recently.

The market outside of China and India is still there, and we did -- as you said, we announced an award in South America. We continue to pursue opportunities in the Middle East. We recently did the JV in China, announced a project that they got in Vietnam, and so there definitely are opportunities out there. We continue to pursue them through the joint venture, as well directly through the power generation group.

Okay. And then following the election here, do you have any thoughts on the American Centrifuge Project and when we might hear additional information about a path forward for that?

I think we remain on the same schedule on ACM. It continues to have broad-based support inside the US government; it certainly has our support. And we're doing everything we can both on the manufacturing side and to support the program management to help USEC. The next couple years I think will tell, how does the technology perform when it's up and running, and then obviously there will be a little bit of a struggle probably just because of reduced government funding that's available. But I still feel pretty good about the overall program and our ability to support it going forward.

The RD&D program that they are working on, the research, development, demonstration project, goes out through the end of 2013.

Okay, thank you.

John Rogers, D.A. Davidson.

Good morning. I just wanted to follow up for a second on the power generation, and you've talked about this, but in terms of the sustainability of revenues, on the environmental retrofit side, you've been ramping up there. And given their comments about a six to seven year sort of buildout cycle, how far are we from sort of hitting the plateau if that's the right way to think about it?

A little bit difficult for us to predict on that side, obviously. We think that, at least for our business, that our revenues on the environmental side will continue to rise for the next two, three, four years. And then we'll have to decide what it actually looks like after that.

Okay. And on the steam generation side with biomass and some of the alternative power plants, is that market sustainable for now?

Yes, I actually think that market has upside opportunity to it. It's going to be led out of Europe, and that's what we are seeing already. And we are well-positioned from a technology standpoint to support that market in Europe and as it expands globally.

Okay. And then lastly, just on the SMR, have you seen interest from other potential investors or is it a process of going out and finding them?

No. We have seen significant interests from other investors, domestically and internationally. It's just a matter of lining up strategic interests and timing on that.

Okay, great. Thank you, appreciate the help.

Randy Bhatia, Capital One Southcoast.

Good morning, guys. Thanks for taking my call here at the late hour. I was curious if you could just give us an update on the prospects for the nuc energy segment ex-mPower. Is there any kind of change to your thinking in terms of growth opportunities there and expansion outside of the core Canadian market?

I'm not sure there's been any change. That's a slow growth opportunity for us. We have good technology in Canada that we are having some success leveraging back into the US. But it is a slow growth area. That's a conservative set of customers on that side of the business, and we need to prove that we can deliver. So far, we have done that. So we will keep pushing on that front, but it's certainly not going to be a growth engine for us in the near term. It's just a small upside opportunity.

Okay, great, that's helpful. And then just a follow-up, if I could. You gave kind of your thinking on the trajectory of the NOG segment for 2013, that it would remain flattish. Could you guys do the same for Technical Services? Is the Y-12 issue going to be a drag here in '13 or should we still be thinking about Tech Services as also flat at near record levels as we look towards 2013?

Tech Services really depends on the outcome of the Y-12 Pantex bid. As we said earlier, just given the timing of the bid and a protest period potentially and turnover, our existing contracts are going to carry over significantly into 2013, and then it depends really on what the outcome of that is. Mary Pat mentioned, if we win, a small decrease, but still a very, very solid business. If we lose, Y-12 Pantex is a little bit more than half of the income in TSG. So it could have an impact. That said, the TSG business segment for us remains a priority. We have some skillsets there, we have some core competencies and we will continue to look for ways to grow that business in the US, perhaps expanding into the DOD marketplace, and expanding internationally.

Great. Any more color on a potential international expansion? Would that be with the same customer or further branching out?

Well, on the TSG side, the easiest place and the first place we would be likely to look would be in the UK. They have a model similar to the model that the US government uses, so that would be the most logical near-term opportunity for us.

All right, great, thanks very much.

I would now like to turn the call over to Jenny for closing remarks.

Thank you for joining us this morning. This concludes our conference call. A replay of this call will be available for a limited time on our website later today. Also available on our website is a Company overview with additional information that will be shared with investors and analysts during various meetings throughout the quarter. Thank you.

Thank you for joining today's conference. This concludes your presentation. You may now disconnect. Good day.