BWX Technologies Inc (BWXT) 2013 Q1 法說會逐字稿

Welcome to the Babcock & Wilcox Company first quarter 2013 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. Instructions will be given at that time. I would now like to turn the call over to our host, Miss Jenny Apker, B&W's Vice President, Treasurer and Investor Relations. Please, go ahead.

Thank you, Garrett. Good morning, everyone. Welcome to the Babcock & Wilcox Company's first quarter 2013 earnings conference call. I'm Jenny Apker, Vice President, Treasurer and Investor Relations at B&W. Joining me this morning are Jim Ferland, B&W's President and Chief Executive Officer and Tony Colatrella, our 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's available on First Call and on our website at Babcock.com. During this call, certain statements we will 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 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 and future results, which 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 operations. A reconciliation of these non-GAAP measures can be found in our first quarter earnings 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 turn the call over to Jim.

Thank you, Jenny. Good morning, everyone. We are pleased to report the 10th consecutive quarter of year-over-year growth and consolidated revenue for the Company. For the first quarter 2013, consolidated revenues were $805.4 million, an increase of 5.2%, compared to the prior year first quarter. Revenue was up year-over-year in three of our four revenue producing segments, with Power Generation posting better than 11% growth, primarily driven by the new build environmental projects. For the first quarter, bookings were $543 million. Backlog, at March 31, was approximately $5.5 billion. Adjusted consolidated operating income, which excludes the impact of the GCI restructuring costs for the first quarter of 2013 was $68.6 million, compared to the $86.4 million in what was a very strong first quarter of 2012.

The decrease reflects the competitive new build environmental market, fewer project close-outs in the period and the completion of several large projects, mostly in our Nuclear Energy segment, that resulted in B&W reporting unusually strong operating margins in the first quarter of last year. It also reflects mPower spend in the first quarter, without the benefit of the DOE cost share program. We expect to record in the second quarter, the cost reimbursement of $21.5 million against pre-award costs incurred in Q4 2012 and Q1 2013. Tony will discuss the results of each segment in more detail shortly.

In the first quarter, the Company generated $0.46 in adjusted earnings per share, excluding the GCI restructuring charges, compared to earnings per share in the first quarter of 2012 of $0.50. During the quarter, we repurchased 2.2 million shares of common stock at a cost of approximately $57 million. Through May 7, 2013, we have repurchased 7.5 million shares of stock for a total of just over $193 million, leaving approximately $57 million of capacity under the original $250 million share repurchase authorization, we announced in November of 2012.

We remain committed to using excess cash to enhance shareholder value. In support of that effort, we are pleased to announce that our Board has authorized an increase in the share repurchase program by an additional $250 million. This additional authorization will allow us to remain in the market with our opportunistic share buyback program. Also, we recently declared our third quarterly dividend of $0.08 per share, which will be payable on June 7, to shareholders of record, on May 17, 2013.

Now, let me shift gears and talk about our business units. Legislative action and regulatory decisions taking place in our nation's capital has always been important to B&W. But over the past several weeks, the Company has been particularly interested in several actions in Washington, DC that will have a meaningful impact on key programs at B&W. The impact of sequestration was of concern to many as we started the year. It now appears that the potential impact to our Nuclear Operations and Technical Services businesses will be even less significant than we anticipated. With respect to our Nuclear Operations business, the continuing resolution passed by Congress and signed by the President restored funding in fiscal year 2013 for the advanced procurement for the second Virginia Class submarine. We expect to book that order during the second quarter.

Within the Technical Services segment, sequestration is expected to only have a minimal impact on the work we conduct at our various DOE sites and on our operating income for 2013. At this point, advanced planning for some level of reduction, together with carefully considered contingency plans developed on a site by site basis have kept staffing and work impact to a minimum at least through 2013. Also related to TSG, last week, the GAO announced its decision to sustain the protest filed by B&W and its partners in the bid for the combined M&O contract at Y-12/Pantex. We were pleased by the results of the GAO's review, as it supported our concerns about the initial award of the contract. At this point, we await guidance from NNSA as to the path forward. In the meantime, we remain focused on operating both sites safely and securely.

About three weeks ago, we announced that we had signed a Cooperative Agreement for funding under the DOE's small modular reactor program. This is a key milestone for mPower. The DOE's cost share program will enable B&W to accelerate R&D spending to meet program milestones, while limiting our net spend in 2013 to between $85 million and $95 million, unchanged from our previous guidance. Preparation for site borings at TVA's Clinch River site are already under way. Our next major Technical milestone is the submittal of the Design Certification Application, which we expect to file with the NRC in the latter half of 2014. Other important mPower related activities are moving forward as well. We continue to talk with a number of potential investors, a key element in our de-risking strategy.

Business development efforts in the US and abroad are focused on identifying the next customers for Generation mPower. We continue to be very encouraged by the level of interest and depth of discussions mPower is generating across the globe.

Lastly, the DOE has agreed to fund the next sub phase of FutureGen 2.0, which is a full scale demonstration of carbon capture and sequestration in Illinois. B&W has signed contracts with the FutureGen Industrial Alliance to provide initial engineering for this project. Our full scope of work will include the design of the plant's oxy-coal combustion system, air quality control systems, boiler and other key components. B&W is pleased to be a part of this innovative project. Our participation underscores B&W's leadership role in providing cutting edge energy technology and clean energy solutions.

Shifting to our commercial businesses, we continue to address changing markets in both of our commercial businesses. As we have discussed with you previously, in our Power Generation segment, the new build environmental market in this cycle is very competitive. Consequently, margins, as we anticipated, are lower for many projects than was the case for projects during the peak of the last environmental cycle. As a result, we're trying to be smart about the work we do in this segment. We're striving through our GCI program to significantly improve our competitiveness on a go forward basis.

Revenue and operating income in our Nuclear Energy segment are lower this year than last. Historically, a significant portion of our Nuclear Services revenues have come from refurbishment projects for the CANDU reactors. This activity is cyclical, based on the timing of outages at the various Canadian nuclear plants. 2012 was a peak year. The number of outages in 2013 will be cyclically low. But we expect an improving trend in 2014 and 2015. We're active pursuing new Services opportunities including Fukushima related projects and multi-year fleet wide Service contracts with major utilities in the US and in Canada. For the second half of 2012, we completed several large commercial Nuclear projects, which we have not at this point replaced. Delays in the release of long lead time procurements for new Nuclear construction projects and uncertainty over the timing of certain nuclear plant restarts in the US, have impacted our backlog. In the meantime, we continue to book smaller projects and to carefully manage costs throughout the organization.

Our Global Competitiveness Initiative remains on track. We begin to recognize the cost savings from several key first quarter actions during the second quarter. It is still our expectation that GCI will produce between $10 million and $15 million of cost savings in 2013 and once completed in 2015, a total of $40 million to $50 million of annual expense savings. In the first quarter, we recognized $8.4 million of restructuring charges associated with this program. Now, Tony will discuss segment results and other financial matters.

Thanks, Jim. Before I get into the specific results of our segment, I want to discuss a change in our segment reporting. Beginning this first quarter, we will report our business in five segments rather than four. We have decided to split our small modular reactor business activities out of the Nuclear Energy segment to increase transparency into the activities of both, the Nuclear Energy and the mPower business units. The new segment which will be called mPower will be reported along with the existing Power Generation, Nuclear Operations, Nuclear Energy and Technical Services segments.

Revenues in the Power Generation segment for the first quarter of 2013 were $461.5 million, compared to $414.3 million in the first quarter of 2012, an increase of 11.4%. This growth in revenues was driven by an increase in new build environmental projects, particularly scrubbers and particulates control devices. Revenues from environmental systems increased 72% in the first quarter of 2013, compared to last year's first quarter, while revenues from new build steam generation systems were down 5.1%, as increases from new industrial and renewable boilers and auxiliary equipment sales were offset by a decrease in utility boiler projects due to the completion of a couple of major contracts during 2012. Revenues from after-market services were down 6.7% in the first quarter, primarily due to a lower level of after-market environmental activity as compared to last year. That said, we are seeing increased activity in our boiler after-market business, primarily as a result of higher natural gas prices, which has driven a high single-digit increase in the use of coal to produce electricity, compared to this time last year.

Excluding GCI restructuring costs, operating income in the Power Generation segment, which includes the equity income of our global joint ventures, was $33.3 million in the first quarter of 2013, compared to $39.5 million for the first quarter of 2012. The year-over-year decrease in operating income was primarily due to lower margins on the current cycle of environmental projects, a lower level of net projects improvements and fewer projects close-out opportunities than was the case in 2012. Equity income contributions from the Company's joint venture in China were also somewhat lower in the quarter, compared to the prior year due to timing, which we expect to fully recover over the balance of the year.

Backlog in Power Generation was $2.3 billion at the end of the first quarter of 2013, compared to $2.7 billion a year ago, reflecting lower orders in the first quarter of 2013 after a record high bookings quarter in Q1 of 2012, which included the West Palm Beach waste-to-energy project. We expect bookings to improve over the balance of the year, reflecting in part several projects that have been awarded but have not yet been booked pending the receipt of the full notice to proceed and based on the strength of the bid pipeline, which totaled approximately $2.9 billion at the end of the quarter.

The Nuclear Operation segment reported record first quarter revenues of $261.1 million in the quarter, an increase of 4.4% from the first quarter of 2012. Nuclear Operation segment operating income was $54.7 million in the first quarter 2013, essentially flat compared to the same period last year. The operating margin in the quarter was 21%, compared to 21.9% in the first quarter of 2012. Backlog in Nuclear Operations at the end of the first quarter remain stable at $2.9 billion.

Nuclear Energy segment revenues were $63.5 million in the first quarter of 2013, compared to revenues of $86.6 million in the first quarter of 2012. Nuclear Energy segment operating income was $2.3 million in the first quarter, versus $11.7 million in the prior year. The decline in both revenues and operating income for the segment is primarily due to cyclical timing of outage services work at Canadian nuclear plants, as Jim mentioned earlier and the completion of two large nuclear equipment contracts that were ongoing during the first quarter last year.

Technical Services segment revenues in the first quarter of 2013 were $25.2 million, compared to $25 million in the prior year. Operating income of $14.2 million decreased $0.9 million in the first quarter of 2013, compared to the first quarter of 2012. This reduction in operating income is due primarily to costs associated with the Y-12/Pantex protest.

mPower segment operating income reflected a loss of $26.9 million in the first quarter of 2013, compared to a $27.9 million loss in the first quarter last year. The improvement in operating income was attributed to lower R&D costs related to the development of B&W mPower and the associated mPower plant including a $0.6 million decrease in non-cash in-kind R&D services contributed by Generation mPower's minority partner. There was no benefit from the DOE cost share program recorded in the first quarter. During the second quarter, in addition to the normal second quarter billing for qualified costs matching from the DOE, the Company will record $21.5 million representing the reimbursement of qualified expenses B&W incurred during the pre-award period, October 1, 2012 through March 31, 2013.

The effective tax rate for the first quarter of 2013 was 26.6%, compared to 32.8% for the first quarter of 2012. This lower rate is primarily attributable to the recognition in the first quarter of 2013 of the impact of the reinstatement of the 2012 R&D tax credit and recognition of certain foreign income exclusions.

The Company's cash and investments position net of debt was $414.9 million at the end of the first quarter 2013, a decrease of $118 million, compared to $532.9 million at the end of 2012.

First quarter net cash flow, which is typically our seasonally weakest quarter due to timing, reflected the use of $26.3 million, compared to a use of $103.2 million for the first three months of 2012. The improvement in cash used for operations in the quarter was, as anticipated, primarily due to lower pension contributions and working capital requirements than was the case in the same period in 2012. During the quarter, $66.2 million of available cash was used to fund our share repurchase and dividend programs. Now, let me turn the call back over to Jim for some final remarks.

Thanks, Tony. Before we open the call to your questions, I would like to make a few comments about our expectations for the balance of the year. We are reaffirming full-year guidance shared on the fourth quarter conference call. We continue to expect consolidated revenues in 2013 will be in the range of $3.4 billion to $3.55 billion. Adjusted earnings per share in 2013 will be in the range of $2.25 to $2.45. I'm pleased at the pace which we have accomplished our share repurchase program and with the increased authorization to continue to opportunistically buyback our common shares.

We continue to evaluate acquisition opportunities to achieve the medium and longer term returns our shareholders expect from us. So far, we have not identified an opportunity that offers the right strategic fit and provides a sufficiently attractive risk-adjusted return to justify the investment. We have a number of opportunities that we're evaluating, but has been the case, we will remain disciplined in our analysis and decision-making. In the meantime, we expect that achievement of the revenue and margin targets we've set for our business units and executing our GCI program, combined with our share repurchase and dividend programs, will deliver attract returns to our shareholders.

Before we start the Q&A, I want to take a moment to discuss our announcement on Monday, that Mary Pat Salomone, the Company's Senior Vice President and Chief Operating Officer will be retiring from B&W after 31 years of service. Mary Pat has agreed to continue in the role of CEO of Nuclear Production Partners, the B&W-led joint venture competing to operate the combined Y-12/Pantex contract for a period of time pending the outcome of that contract award. In connection with the bid, B&W developed plans for Mary Pat's eventual transition to Nuclear Production Partners. As a result, B&W and Mary Pat are well positioned to execute this transition. I want to personally thank Mary Pat for her long-term service and many contributions to the Company. Her vision and leadership helped drive critical business initiatives that contributed to B&W's overall growth. 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)

Andy Kaplowitz, Barclays.

Jim, so we can appreciate your comments about bookings ramping up as the year goes on. I'm talking about the Power business. But if you listen to the conference calls this quarter, it seemed like industry-wide, there was a bit of a slowdown in orders. So can you talk about that? I'm really talking about utility fired boiler work. Can you talk about -- have you seen that? Or is it really just timing and you expect a better year here versus the first quarter?

I think, Andy, relative to the first quarter bookings, I think it's timing. I do expect bookings to ramp up as we move through the year. Much as we have discussed for the last couple of quarters, the utilities continue to be a little bit slower than we expected a year or so ago, in making these investment decisions. But we do expect bookings to ramp up the last three quarters of the year for our Power Generation.

Okay, easy. Then maybe asking about Power Gen margins. I mean, we know that seasonally, this is a weak quarter, so we do expect some ramp-up there. But at the same time, you have changed your pension accounting. You still kind of came in at the low end of the range. Again, I would ask the same question, Jim. Is it just sort of seasonality that kept margins down? We know it is a competitive environment but should you see decent improvement in margins as the year goes forward?

Yes. Andy, I actually had anticipated that the first question would be the margin question and the second question would be the bookings question.

I'm too predictable.

That said, the 7.2% number for PGG margin for Q1 does jump off the page. So off the bat, I would tell you that we expect to finish the year for PPG in the 9% to 10.5% range on margin. So we do expect these numbers to recover the last three quarters. Q1 as you mentioned is a seasonally low number for us to begin with. That was magnified a little bit this year. We had an abnormally low number of project close-outs in Q1 of 2013. Typically, in the project close-outs, that is where we capture whatever remaining contingency or warranty there is in the budget. It usually creates a little bit of a jump for the project. So we had a combined seasonally low number. Even for the quarter, an abnormally low number of close-outs. We expect that to pick up the last three quarters of the year. Tony mentioned that JV income in PPG was slightly lower in Q1. We expect that to return to normal the last three quarters. Lastly, GCI savings essentially zero in Q1 for PGG. That said, we took an awful lot of GCI related actions. We expect those savings to build in a little bit in Q2 and then even stronger in Q3 and Q4.

Those actions were also pretty much at the very end of the quarter.

Correct.

Okay, that's great. Just one clarification, Jim. 9% to 10.5% in the last three quarters or for the entire year? I don't know if it matters that much, but --

For the year.

Jamie Cook, Credit Suisse.

Just to -- back to the Power Gen margins. It sounds like the improvement is a function of -- you talked about GCI, you talked about project close-outs, et cetera. But can you talk about -- you mentioned in your prepared remarks that there were some orders that hadn't hit yet, which we'd probably get in the second quarter in Power Gen. Can you talk about the margin profile on that business? Whether it is still sort of below your targeted range for that segment? The magnitude of those awards? Then, my second question relates to Y-12/Pantex. I think last time, in your previous guidance, you assumed seven to eight months. How does that change -- of income from those projects? Does that change at all with the protest? Then last, just your thoughts on potentially winning the Sandia project? Thanks. I will get back in queue.

Good morning, Jamie. I think, Tony is going to address the first half of the question around PGG bookings and the margin that exists inside those bookings. Then I will touch on Y-12. If we miss any of the sub parts, jump back in and let us know what we missed. So, Tony?

Okay, great.

I would say the first quarter bookings that were missed -- the biggest impact there really has to do with our ability to absorb some of our operating overheads. So we had some under-absorption of operating overheads within the PGG segment. To the extent we get started on more projects, that overhead, which in the very near term tends to be more fixed than variable, will be better utilized. In terms of the margins themselves, the margins continue to be competitive as we have been stating for really the last three or four quarters. Not particularly worse or better than they have been, they have been remaining fairly stable. But nonetheless, clearly not as robust as they were during the last environmental boom three or four years ago.

Then I'm sorry. What was the size of the bookings that we should expect hitting Q2 that you know of today? Can you put a dollar amount on that?

Well, I think the best thing to say is, let's wait and see what gets booked. Because as I said, there's three or four projects that are -- I would say moderate in size. There is no mega project there. But they are significant enough, where had they been booked in the quarter, we would be having a different conversation about bookings.

Okay. Thanks. The second question on Y-12/Pantex and then Sandia? Thanks.

So on Y-12/Pantex, the assumption we put into the earnings estimates for 2013 was that B&W would hold that Y-12/Pantex contract through the end of August. Obviously, we're happy with the ruling from the GAO. At this point, I would probably stick with the end of August estimate.

Okay.

As to when we will hold that project. We will know a lot more -- the next step in the process is NNSA takes a look at the GAO recommendation and decides what the next steps will be. That could take a couple of weeks. That could take a couple of months. We will have a much better idea of the process going forward; and our timing on Y-12/Pantex once we hear back from NNSA.

Okay.

Then, Jamie, the question on Sandia was what?

Just timing of award? How you think you're positioned competitively? Any update there?

Yes. We still expect the procurement process of the RFP to come out mid to late this year, on Sandia. I think we're positioned well for that competition. As you know, the positioning takes place 12, 18, 24 months in advance of the actual procurement. Different companies look around for who we think would be the best partners to work with. So I think we're well positioned on that. It is just a matter of, when is that procurement going to come out? Is the DOE going to try to for example work their way through the Y-12/Pantex procurement before they issue Sandia? Or is there a chance they are going to run these for a short period of time in parallel? We will just have to wait and see.

Tahira Afzal, KeyBanc Capital Markets.

This is actually [Saagar] on for Tahira. First, related to the submarine. You mentioned that in the continuing resolution, the Congress has funded the second -- the procurement for the second Virginia Class submarine. You will be looking at booking that in the second quarter. In terms of size, what should we think about? I know in the past, you've booked these increments of anywhere from $600 million to $800 million, but they have been two subs together. Should we look at this as a $300 million to $400 million booking in the second quarter?

Yes, my recommendation on that would be to wait and see what actually comes out. I'm hesitant to give any numbers out until we actually sign the award.

Okay. Thank you. Then a follow-up related to your margin profile. You mentioned the Power Generation segment and with GCI savings ramping up, you think that is going to be 9% to 10.5% for the full year? Could you walk us through your other operating segments? How the margin range is going to be as GCI savings starts flowing through? Thank you.

Let me kick it off. Then I will ask Tony to step in on a couple. Just a comment on how to think about GCI. When we gave a couple different estimates for ranges of GCI savings, $10 million to $15 million in the current year and then $40 million to $50 million on an annual recurring basis, once we get to 2015. About half of those savings, perhaps a little bit more, flow directly to PGG. Another 20%, give or take, come to Corporate. Then they're essentially allocated back out to the business units. Once again, a decent proportion of those flowing to PGG. The remainder of the GCI savings spread out among the rest of the businesses, probably with the other commercial business, NE coming at the head of that line.

So that is the best way to think of the GCI savings. Just -- and I think we've talked about PGG margins, although if folks have more questions, we can certainly talk about that again. So the other only other comment on individual business unit margins, since you opened up the door, would be in NOG. We experienced very good margins, 21% range, in NOG, in Q1 of 2013. That said, and we've said this on previous calls, we would expect the margins in NOG to drop a couple of percent over time. Just thinking about what is sustainable in the long-term in that business. Great margins in any case.

The only comment I would make regarding NOG is over time, that would be true, in the current quarter, we are very pleased with the margin of 21%, and so far, so good this year.

Robert Labick, CJS Securities.

I just wanted to focus on Nuclear Energy a little bit. You elaborated a little in your comments. I was hoping you could talk a little bit more about the market dynamics there, both inside Canada, then more specifically outside, what you're doing to grow that work? What that business might look like three to five years from now.

Sure. I think you characterized the NE business well. It is primarily a Canadian-based business. When we talk a little bit about cyclicality and performance this quarter versus the same quarter last year, it is really driven by what is happening in Canada. It is that combination of outage related products for the CANDU units and whatever manufacturing work flow is moving through the factory outside Toronto. That is the primary driver. We continue to be very well positioned in the Canadian marketplace. I would expect that to continue going forward. It is just a matter of when does the work come out. We will certainly get our fair share of both the services and the manufacturing work in the Canadian marketplace. The longer term upside in Canada would be if the Canadian utilities, either OPG or Bruce Power, choose to do additional refurbishment on the existing CANDU units or move it ahead on the plans that they're talking about today for new build nuclear in Canada. Those would both present upside opportunities for us in the Canadian marketplace.

The NE business in the US and internationally, I would say that we have stepped up our focus on trying to develop opportunities in those two marketplaces. As I've said before, those are difficult markets to break into. For the most part, success in those markets requires us taking market share from somebody else that is already in the market, as opposed to expanding into a growing market. So it is a bit of an uphill climb. But we continue to look for opportunities. Over the next couple of years, I would think the performance of the NE business is going to be dominated by how well we do in Canada, as opposed to how fast we grow outside of Canada. Not that we're not looking, but that is just the reality of the business.

Great. Thank you very much for that color. Then just for my follow-up, if you will. You discussed looking at partners for mPower. You've discussed it before, you said you're continuing that process. Could you tell us a little bit about what you're looking for in future partners for mPower, please?

Sure. A couple of things. Number one, we're looking for partners that bring something to the project. Number one -- beyond just money and sharing the risk, which are of importance to us as well. But typically we are looking for partners that bring something technically to the project that will enhance the mPower technology or speed us to market or reduce risk during construction. So examples might be companies that provide turbines, companies that provide INC control system, companies that supply heavy switch gear, all important components of a small nuclear plant but all things that B&W does not do. Additionally, a second tier or a second level of partners we look to, over time, would be companies that give us access to the international marketplace that we don't necessarily have today. As our belief continues to be, mPower will be a technology solution in the US, but the broader market opportunities and the real upside for mPower lies internationally, primarily in the Asian marketplaces and the Middle East.

Brian Konigsberg, Vertical Research.

Just following up on the PG margins, I apologize -- but I'm just curious, as far as the 2013 outlook, how much are the environmental retrofit awards that you have been bringing in-house over the last 4 to 6 quarters or so playing into the 2013 range? Does it become more onerous of a headwind in 2014 or 2015 possibly as we get deeper into the project work? I'm just curious, does it get -- does that play incrementally more of a headwind in 2014 versus 2013 and maybe it is offset by the restructuring actions that you're taking?

My take Brian, is the headwind that exists today in 2013, on those environmental upgrade projects, is not likely to get worse moving into 2014 and 2015. I think we're already there. We're doing a lot of environmental work today. We're booking a lot of environmental work going forward. In the margins on the projects that we have today and the margins we would expect to have on the projects in 2014, 2015, I think are relatively flat.

Got you. Thank you. Then just secondly, on in-kind R&D, when we first started discussing that, I believe we said that or the Management team had said that would transition to a tailwind from an accounting standpoint in 2013 and beyond. Is that still the expectation? Or has that changed to some degree? How does that play into your guidance?

Well, for the current year, I think that we will continue to have in-kind R&D reported as an additional cost absorbed, if you will, consolidated into our results. It is offset by the non-controlling interest which we back out, further down in the P&L. So your question really is, when will the in-kind R&D swing to the point where we are doing more work than our partner is, I think that is still a ways out yet. But there is an expectation it will turn. It is just not going to turn in 20 -- I don't think it is going to turn in 2013.

Got you. Just one last one if I can. Just on the FutureGen project you're working on. This is a little bit further out. But I guess, when do you anticipate that could become more of a substantial business for Babcock and really the industry in general and maybe start contributing in a more significant way?

Today, FutureGen is primarily an engineering work scope for us. Over the next couple of years, assuming FutureGen gets the go-ahead from its owners, it will turn into more of engineering combined with manufacturing and on-site construction, for B&W. If we're looking even further into the future, at greenhouse gas regulations, CO2 carbon tax or cap and trade, that is what would make carbon capture and storage more viable. But I think we're looking three, four, five, six years in the future before that becomes anything like a sustaining opportunity. So in the short run, carbon capture and storage, it is really driven by what happens with FutureGen. Longer run upside opportunity, that is why we're interested in FutureGen, both for the work it brings us in the short term, but really for where it positions us in the marketplace on carbon capture and storage in the long run. That said, it is three, four, five years out before that is a real business opportunity for us.

Steven Fisher, UBS.

Tony, what still has to happen for those three to four Power projects to get booked? Are there still any uncertainties left around that? Or is that a lock for Q2? Then still related to Power, does your plan call for year-over-year revenue growth in each quarter for the rest of the year?

Okay. Regarding the first question, what has to happen is, we have to be given the full notice to proceed on a couple of these projects. At least two, if not three, from memory. Those projects are -- a couple of them are international projects. So it is a little more complicated than it would be if it was just dealing with a utility here in the US. But we feel they're fairly far along in terms of the indication of when we're going to get the full notice to proceed. So I would expect to see some movement certainly over the next couple of quarters. The second part of your question, I'm sorry, Steven?

I'm just wondering if your plan is calling for year-over-year revenue growth in Power for each of the quarters for the rest of the year?

Revenue growth, year-over-year, in Power?

Yes.

The answer is yes. I think our guidance previously was at least mid single-digits, perhaps a little bit more in growth for the full year, versus 2012. That's still the case.

Okay. Great. Then just on mPower, how should we think about the Q3 and Q4 benefit you're going to get from the DOE on that program?

Do you want to answer that, Jim?

Yes. I would think the simple answer on mPower is that we -- on the B&W side, expect to spend $85 million to $95 million of our money, net -- net of the government grant program. That should be the overriding assumption, as you try to determine exactly what cash is moving where and what quarter, keep in mind the $85 million to $95 million number for the year.

But on the P&L, I mean you're going to get a probably -- show a net positive result in the second quarter, about a $21.5 million benefit, offsetting your costs. So in the third and fourth quarter, should we assume that are you going to have a $10 million, $11 million offset in each of those quarters against that $85 million to $95 million annual run rate of spend?

Yes. When we give you the $85 million to $95 million run rate, that already incorporates the money we expect to get from the DOE.

Okay.

So if we didn't have the money, we would either be spending more or we would be ramping back the program.

Will Gabrielski, Lazard.

Can you just talk about the savings associated with GCI that you said you achieved relatively late in the quarter? Were those more geared towards PGG or corporate? Or is there any way we can allocate that in Q2?

Will, I would say that the GCI actions that were taken in the first part of the year will probably be right along the split that I gave originally, which is a half, give or take, out of PGG, about 20%, 25% from corporate, and the rest spread throughout the businesses. That's probably a fair set of numbers, both in the long run and the short run.

Okay. The equity income in China, you're trying to JV during the quarter. You guys commented on some of the seasonality and timing. But if you look at the Chinese market, over the next few years, what are you guys expecting there?

The market -- well, first of all, we had a very -- virtually no bookings in 2011. Then we had a pretty nice rebound in 2012. The backlog has been fairly well rebuilt to its historical levels. What we're expecting is the release of some of the work that is waiting, that is part -- although we don't consolidate that work, it is the same story, which is getting the full notice to proceed. That work will result in additional factory hours. Those additional factory hours will help improve the operating income for the JV over the last three quarters of the year.

We expect for the full year, the operating income to be roughly in line for China with what we realized last year, where we were working off of projects that were booked two or three years earlier. Then we had a little bit of a slowdown towards the end of the year. But on balance for the full year, we came in at a number that we think we will be consistent with this year. The problem in Q1 was the factory activity was lower because we were waiting the release of some of these orders. As a result, we had some under-absorption costs there.

Okay. Then lastly, can you either go through the milestones that you need to hit with mPower? What the timing of those milestones might be? Then also as part of mPower, we ask a lot what you were looking for in a partner or an investor, but what type of feedback are you getting as you market the business from what others are looking for? Do they want to see you pass some milestones first? Or is this just the due diligence process that hopefully culminates with an investor this year?

Sure. Let me -- I will touch on a couple of the key milestones going forward. Next big one is submittal of the Design Certification Application to the NRC, late 2014. We would expect our partner, TVA to submit a combined construction operating license in 2015. Then for the next couple of years, we stay inside NRC licensing process. In the 2017 time frame, we would expect to receive design certification. We would expect our partner to receive their combined operating license. That is the window in which we would expect to sign some actual contracts, perhaps earlier, but that is probably a conservative estimate. Your second question was around when we consider bringing on partners, do the partners tend to want to come in today? Or do they tend to want to wait and come in after licensing?

We have a mixture. We have a variety of partners that are interested in coming on to the project today. I think we will have more in the future as the certainty around mPower increases, which will come with license application submittal and then actually receiving the license and then receiving the first orders. When I think about this, it is a bit of a trade-off. I would like to have a couple of partners come on board in the near term, to bring their technical expertise or their market access and to help fund some of the project going forward. I recognize that bringing on partners today, I might be giving them a better deal than they're going to get three or four years from now when perhaps mPower is worth more. So it is a bit of a trade-off for us. The thinking today is that even though we might not be getting the price we could get in 2018, it still makes sense to bring on a couple of partners just to solidify the project going forward.

Chase Jacobson, William Blair.

A question on the Nuclear Energy business. You talked about a potential for post-Fukushima work. We have heard a lot of other companies talking about that. I know those awards probably don't start getting released until late 2013 or 2014, but could you talk about your positioning on that, as you try to increase your exposure to the US nuclear market? Whether you're trying to position B&W as a service provider for post-Fukushima work? Or as an equipment provider for post-Fukushima work?

Sure, Chase. I think that your timing estimate on when the post-Fukushima work will show up is probably correct. It is later this year into 2014 into 2015. As far as B&W positioning on that work, it might be equipment related work, if we can put it through some of our existing facilities. But it is more so integrated project management and engineering of the projects themselves. That is really where our value niche will be. Then we could do some of the equipment related work ourselves or we could sub out some of the specific work scopes. But we're more an integrator, engineer, project execution firm in that marketplace.

Okay. So I mean this is a market, though, kind of like the EPA environmental market, where there is pretty good visibility from still a while out. Do you expect it to be competitive like the environmental market is now?

Yes. A couple of comments. One, we definitely expect it to be competitive. Everybody can see this work coming. Two, we're in a very different position in this market than we are in the environmental marketplace in PGG. In the PGG work, we're one of the market leaders. We capture a large percentage of that marketplace. The question is, for PGG, is how competitive is it? What margins can we command? How low can we drive our internal cost structure? The NE business is very different. We're more of an upstart. We have a very small market share today. We're trying to take market share from the two or three large providers that are out there. So we are just in a very different place in those two markets.

Okay. Then a question on capital allocation, if I could. You guys bought back quite a bit of shares to date in the second quarter. You are also looking -- it sounds actively -- it sounds like you're looking actively at acquisitions still. Could you just talk about how you're balancing the decisions between the two? Whether it is return to shareholders or acquisitions? How you may leverage the balance sheet, considering you have essentially no debt still? Thanks.

Sure. So you're correct, we're looking at acquisitions as well as share repurchase. The key on the acquisitions is we're looking for the right acquisition, an opportunity that is tied to our core competencies. One that brings significant, either cost or revenue synergies with it. The reality is, any acquisition that we're going to pursue has to provide more value to the shareholders than a buyback of our shares today. I think we have a very disciplined approach to that evaluation process. We will continue that going forward. Your question about taking on debt. If we found the right acquisition opportunity, we would consider taking on debt to fund it. But it has to be the right acquisition opportunity. Then just a comment on the speed of the share buyback program. You referenced, we were pretty aggressive in the marketplace the last few the last few months. We did receive from the Board the additional authorization for another $250 million. I would expect us to remain opportunistic in the marketplace, as the year goes on. But perhaps not at quite the pace of the last eight months.

Martin Malloy, Johnson Rice.

I was wondering if you could talk maybe a little bit about the demand that you're seeing outside the China market and the international markets for the solid fuel boilers?

I'm sorry, Marty. For what? We didn't hear you.

The solid fuel boilers.

I would say -- as we had mentioned before, we continue to see opportunities outside China. We're actually leveraging the manufacturing in China for other opportunities in Asia. The examples being a couple of contracts we signed in Vietnam in the last two or three quarters. Those opportunities continue to come in. I don't see them necessarily coming in at a larger -- at a faster or a slower rate. We do continue to pursue opportunities outside Southeast Asia that are not in the US and Europe, for example, in the Middle East. Once again, it is a relatively difficult market for us to break into. But we continue to chase those opportunities. At some point, I think we will find a way to play in that market as well.

Those opportunities are fairly large, but very lumpy, to Jim's point.

Yes.

Randy Bhatia, Capital One Southcoast.

I guess, Jim, just looking for some specifics on your comments on the share repurchase activity. I apologize if you guys have given this in the past. But can you tell me what the share count assumption is? Embedded in that $2.25 to $2.45 guidance for the full year?

The assumption in that, that we have in our share count was really predicated on essentially completing the program that we're working on -- the $250 million authorization -- I'm sorry, $150 million, the original $150 million authorization. I was just corrected -- and not more.

Okay. You've surpassed that now, right?

Yes.

Okay. Then if I could, just one more on the M&A side. Can you kind of talk about what progress you have made in terms of what you're looking for from an end market perspective? I mean have you found a kind of niche that you are especially attracted to or looking for and just haven't found the right opportunity? Or are you still throwing ideas up on a white board? Or can you just kind of talk about where are you in terms of making an acquisition? Thank you.

Sure. I would say we are very much engaged in the process. We're in, what I would call, the filtering mode. We know what direction we would like to look. We're sorting through the various opportunities, looking for opportunities that fit in best with us, combined with opportunities that are actionable going forward. So I would say, we're well through the sifting process and in the prioritization process and trying to make some of them a reality. Again, as to where we're looking, we're focused on what we think our core competencies are. We play very well in the Power markets. We have very good project execution skills. We play at the medium to high end of the Technology range. We don't have any interest in expanding down, from a Technology margin standpoint. So that's really where we're looking. We're looking to leverage what we have and expand it a bit. Or we're looking to leverage what we have in one geography and expand it into another. That said, we continue to be pretty disciplined in the process and very careful in our decision making.

Thank you for joining us this morning. That 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 for joining us today.

Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Thank you very much.