BWX Technologies Inc (BWXT) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Babcock and Wilcox Company second-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 and 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 Francis and good morning, everyone. Welcome to the Babcock & Wilcox Company's second-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 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 provisions 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 that 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 second-quarter earnings release issued last night, and in our Company overview presentation, posted on the investor relations section of our website at Babcock.com.

Due to the number of participants on today's call, I would ask you limit yourself to one question and perhaps one follow-up. You are, of course, welcome to get back into the queue. With that, I will turn the call over to Jim.

Thank you Jenny. Good morning everyone. We are pleased to report the 11th consecutive quarter of year-over-year growth and in consolidated revenue for the Company. For the second quarter 2013, consolidated revenues were $886 million, an increase of 3.9% compared to the prior-year second quarter. Bookings in the second quarter were $766 million, a 25% increase compared with the same period last year. And the total backlog at June 30, 2013 was approximately $5.4 billion.

Adjusted consolidated operating income, which excludes the impact of GCI restructuring costs, for the second quarter of 2013 was $111 million, compared to $110 million in the second quarter of 2012. The Nuclear Operations group posted an approximately $10 million increase in operating income, primarily as a result of long lead time material procurements, which drove higher sales and operating margins, and higher margins on down blending contracts at nuclear field services in the quarter. And Power operating income improved by almost $32 million due to recognition of the cost sharing award from the DOE. Partially offsetting these increases, the Power Generation group operating income decreased approximately $28 million in the quarter compared to the corresponding period in 2012, primarily driven by additional contract losses of $30 million related to a biomass boiler project. Without this project loss Power Generation operating income would have been better than last year by almost $3 million.

Earnings in the Nuclear Energy segment decreased by $12 million in the quarter, attributable to an $18 million contract claims settlement recognized in the second quarter of 2012. Tony will discuss the segment results in more detail shortly.

In the second quarter the Company generated $0.72 in adjusted earnings per share, excluding GCI restructuring charges, compared to earnings per share in the second quarter of 2012 of $0.65. During the quarter, we repurchased 2.5 million shares of common stock at a cost of approximately $69 million. Through June 30, 2013, we have repurchased a total of 8.5 million shares at a cost of approximately $222 million, leaving an additional $278 million of capacity for share buybacks under our $500 million repurchase authorization.

Let's move to a discussion of the overall energy environment and to its impact on our commercial segments. President Obama's Climate Action Plan has sparked a renewed dialogue about the future of coal and natural gas for electricity generation, as both are greenhouse gas emitters. From our perspective there are both positives and negatives in this plan for B&W. Directionally, we would expect to see increased federal spending on research and development of carbon capture and sequestration technologies for which we are well positioned with a number of potential solutions. Any clarity the plan could add in regard to the pricing of CO2 in the US marketplace would likely benefit our emissions-free generation technologies, including nuclear.

On the other hand, the plan could complicate utility decision making in regard to future capital investments in their operating coal fleets. In any case we see the President's plan as a first step in what will be a lengthy process involving multiple stakeholders. We plan to remain involved in this discussion in Washington to ensure our views are represented and we incorporate potential policy decisions into our long-term corporate strategies.

Moving from greenhouse gases to other environmental regulations. In June the Supreme Court announced that it would review the District Court's August 2012 decision to vacate the EPA's cross-state air pollution rules. The ruling last summer prompted utilities to delay spending on equipment that would reduce SOx and NOx emissions in their coal-fired plants, and accordingly pushed out B&Ws opportunity to provide this environmental equipment. Ultimately, we believe the timing of revised regulations remains at least one to two years away.

On a positive note for the first six months of the year, coal produced 39% of US electricity output, up from 35% for the same period last year. This resulted primarily from an increase in the price of natural gas. For B&W this translated into an improvement in replacement part sales, which we have seen this quarter, and eventually we believe this will have a positive effect on our service project revenue.

Moving to some specific Company items. We are pleased to announce that our Indian joint venture has received its first project award, a boiler island unit to be manufactured and constructed in India. The size of this first project is approximately $180 million. There exists the potential for a second unit to be added to this contract.

I also want to take a minute to give you some additional detail and thoughts on the $30 million PGG project loss during the second quarter. This loss is in addition to approximately $15 million of net losses we recognized on this project in the fourth quarter of 2012. The project is a biomass-fired power plant being built on a brownfield site. The project included the conversion of an existing B&W boiler that had been taken out of service in 2006. The core B&W technology required for this project is squarely in our wheel house, and the design and construction of the boiler and environmental equipment have gone well.

Unfortunately we encountered issues related to the balance of plant work scope, primarily undisclosed subterranean site conditions that have required significant unforeseen civil-related activities that resulted in a substantial increase in site preparation costs, combined with the consequent schedule days and labor inefficiencies. The scope of the project, in particular the extension of the work beyond the boiler and environmental equipment, is unique for B&W. As we typically only take on this work with an experienced EPC partner in a JV or consortium relationship.

In this case we undertook this project in 2011 in an effort to expand into a broader business line. Since that time we have reevaluated our approach to these types of projects and plan to seek JV or consortium partners for scopes outside B&W's traditional areas of expertise. To that end we have reviewed every project in the Power Generation portfolio, and confirmed that there are no other projects where B&W has taken responsibility for the extensive balance of plant scope we encountered on this project.

As of this week the project is approximately 91% complete, and we believe we have appropriately reserved for known and anticipated financial exposures on the project. We expect to achieve substantial completion of this project in the fourth quarter of this year. We have filed significant claims with our customer, and will aggressively pursue the fair resolution of these claims. Any recovery of these additional losses will be recognized in a future period.

Performance in the Technical Services group is modestly exceeding our internal expectations for the business for this year. Sequestration thus far has had only a minimal impact on the operations at the sites at which we were involved. There have been notable performance improvements at a number of our sites, which could result in potential increases in project scope or contract extensions.

As you probably read, MP-Squared, a consortium in which we have bid for the combined Y-12/Pantex contract, filed a second protest with the GAO, regarding the process associated with NNSA's response to the GAO's recommendation when the GAO upheld our first protest. The GAO's response to the second protest is due on or before September 25. B&W continues its leadership role in managing both Y-12 and Pantex under the existing contracts and remains focused on operating both sites safely and securely. At this point, we expect we will continue to do so at least through the end of 2013.

During the second quarter the mPower program received more than $37 million in cost share funding under the DOE's small modular reactor program. We are pleased to have this award to support our continued investment in the development of our SMR technology. As we have been doing throughout the Company, we are rigorously evaluating and managing spending on the mPower program, including both R&D expenses and business development and administrative costs. Through prudent cost management, we expect to lower the Company's net spending in mPower for the full year compared to our previous guidance by approximately $5 million, without significantly impacting mPower's ability to achieve the program's targeted milestones.

We remain engaged with supporters of this program, the DOE and Congress, to ensure that the 2014 budget includes maximum funding and to identify other potential sources of government funding for mPower. We also continue to have constructive dialogue with a number of potential strategic investors. Bringing new partners into Generation mPower is clearly a complicated process that will take more than a few months to complete. Challenges include the sharing of risk, agreement on valuation, as well as each partner's scope and return expectations. SMR technology and mPower specifically have been getting a fair amount of positive exposure over the past few months, including a callout in the President's Climate Action Plan. We continue to be encouraged by the level of interest in mPower in the US and globally.

Our global competitiveness initiative is progressing very well, and we are seeing a cultural change with a focus on efficiency in all of our operations. A number of actions were taken toward the end of the first quarter and during the second quarter that are already delivering operational benefits in realized cost savings. In addition, we have identified several other opportunities to improve efficiency and effectiveness while lowering costs. For example in IT and supply chain, that we expect will enhance the impact of the GCI program. As a result, we expect that cost savings realized in 2013 and annually when complete will be above our original targets of $10 million to $15 million for 2013, and $40 million to $50 million for the full-year periods. In the second quarter, we recognized $12.2 million of restructuring charges associated with this program, in line with our expectations. Now, Tony will discuss segment results and other financial matters.

Thanks Jim. Revenues in the Power Generation segment for the second quarter of 2013 were $471.2 million, compared to $497 million in the second quarter of 2012, a decrease of 5.5%. An increase in new build environmental projects, particularly SCRs, and particulate control devices, was offset by lower revenue from new build steam generation systems and aftermarket services. Revenues from environmental systems increased 22.3% in the second quarter of 2013 compared to last year's second quarter. New build steam generations systems revenue decreased 24.4%, largely due to revenue adjustments made in accordance with percentage of completion accounting on the biomass project that Jim discussed earlier. Aftermarket services revenues were lower than last year by 5.2%, primarily due to a lower volume of environmental retrofit and rebuild projects, which were partially offset by an increase in boiler-related aftermarket retrofit and rebuild projects, parts, and services.

Operating income in the Power Generation segment, including the equity income of our global joint ventures, was $30.5 million in the second quarter of 2013, compared to $58.1 million in the same period last year. The decrease in operating income is more than explained by the $30.2 million in contract losses discussed previously. Decreases in income due to lower revenues were partially offset by lower selling, general, and administrative expenses, attributable to ongoing cost reduction initiatives and higher equity income of $2.1 million, primarily from our joint venture in China. Again with the exception of project loss recognized this quarter, Power Generation delivered a good quarter in terms of both operating income and margins.

Backlog in Power Generation was $2.3 billion at the end of the second quarter 2013, compared to $2.6 billion a year ago. Bookings in the quarter totaled $490.3 million, versus $374.8 million in the second quarter of 2012, reflecting improvements in new build environmental equipment orders and the receipt of the full notice to proceed on a previously awarded waste energy project. The bid pipeline was approximately $2.5 billion at the end of the quarter.

Nuclear Operations segment reported record second-quarter revenues of $331 million, an increase of $65.6 million or 24.7% from the second quarter of 2012. A significant portion of this increase was due to the timing of long lead time material procurement related to future component fabrication. Adjusting for the timing of material deliveries, the growth rate in our Nuclear Operations business should remain solidly in the mid-single digit range.

Nuclear Operations segment operating income, which was also an all time record, was $65.7 million in the second quarter of 2013, an increase of $10.3 million compared to the same period in 2012, primarily due to the increased revenue and improved performance on Naval nuclear fuel and down blending contracts in NFS. Backlog in Nuclear Operations was $2.8 billion at the end of the second quarter, down slightly from $2.9 billion at June 30, 2012.

Revenues for Nuclear Energy were $63.2 million in the second quarter of 2013, compared to $67.4 million in the second quarter of 2012. Nuclear Energy segment operating income was $7.9 million in the quarter, versus $20.3 million in the prior-year period. In the second quarter of 2012 both revenue and operating income benefited from an $18.1 million contract claims settlement. The impact of last year's claims recovery was partially offset in the quarter by increased activity in the Nuclear Services business, and maintenance and project services revenues. Similarly, the decrease in operating income in the quarter as compared to Q2 of 2012 was partially offset by the impact of higher volume and operating margins together with reduced warranty expenses.

Technical Services segment revenues in the second quarter of 2013 were $27.4 million, down 3.2% compared to $28.3 million in the prior year. Operating income of $15.2 million decreased $3.7 million in the quarter compared to the second quarter of 2012. This decrease is primarily attributable to lower estimated award fees and costs related to the restructuring of a contract, partially offset by lower SG&A expenses due to ongoing cost control efforts. In addition, the 2012 period included a $1.2 million gain from the sale of our interest in a join venture associated with the maintenance and operations of the Strategic Petroleum Reserve.

mPower segment operating income increased $31.6 million to a loss of $1.1 million in the quarter, compared to a loss of $32.7 million in the second quarter of last year. The improvement in operating income was primarily due to the recognition of $37.8 million of the cost sharing award from the DOE under the cooperative agreement as a reduction in R&D costs. The cost sharing amount recognized includes $21.5 million of pre-award cost reimbursement for qualified costs incurred for the six month period prior to April 1, 2013. Excluding the impact of the DOE award, R&D activities related to the continued development for mPower increased quarter over quarter by $4.3 million.

The effective tax rate for the second quarter of 2013 was 29.8% compared to 34.7% for the second quarter of 2012. This lower rate in the quarter was primarily due to the impact of implementing a number of tax optimization strategies. For the full year we expect the effective tax rate will be in the range of 30% to 32%. The Company's cash and investments position net of debt was $358.7 million at the end of the second quarter of 2013, a decrease in the quarter of $56.2 million. Uses of cash in the second quarter of 2013 included pension contributions of $15 million, and $78 million to fund our share repurchase and dividend programs.

Now I would like to address our expectations for the balance of the year. We now expect revenue for the year will be between $3.4 billion and $3.5 billion, which is a slightly narrower range than we previously disclosed. We were affirming guidance for adjusted earnings per share in 2013, in the range of $2.25 to $2.45 per share. That said, there are a few changes to the assumptions that get us there.

We are forecasting better results in our two government segments and mPower, offset by weaker performance in the commercial segments. We are also anticipating greater GCI savings and a lower effective tax rate as I earlier mentioned for the year than previously forecast. Now let me turn the call back over to Jim for some final remarks.

Thanks Tony. With strong performance across the business units and prudent cost control, we were able to offset a significant problem project and exceed Q2 performance in 2012.

Nuclear Operations performance for the quarter was strong and steady. The underlying performance of Power Generation, except for the single lost contract, was strong in somewhat challenging market conditions. Technical Services exceeded our internal expectations against a backdrop of sequestration concerns, and our cost savings efforts under GCI are realizing better results than originally outlined.

As Tony mentioned, we are holding earnings guidance for the year. To add a little more detail, without a favorable claim resolution on the PGG biomass project, we expect to be in the lower half of the guidance range, and the upper half of the range with a favorable claim resolution.

We continue to take actions that enhance the growth of our business, improve profitability, and ultimately increase shareholder value. That concludes our prepared remarks. I will now turn the call back over to Francis, who will assist us in taking your questions.

(Operator instructions)

Tahira Afzal from KeyBanc. You may proceed.

Good morning.

Good morning.

I guess my first question is you have had several positive developments that you have highlighted on the call. And are you surprised that you are guiding to the lower end of your range, even with a favorable -- or even just to the upper end of your guidance with a favorable [measurement or claims], even though incrementally, it seems there have been a couple of things that have improved since then, including Y-12 maybe contributing a little more than you thought, and GCI et cetera, is working out better for you at mPower. I guess my question is, is there anything outside of this project that has incrementally changed?

There is really nothing that we haven't already discussed that has changed. Just a couple of thoughts and then I'll ask Tony to add onto the answer. We are doing quite a bit better than we had originally anticipated on the GCI front. That said, the majority of that upside is in the future. We are recognizing a little bit of that in 2013 but a lot more of that upside is 2014, 2015.

NOG is strong and steady. And there may be a little bit of upside in TSG through Y-12/Pantex as you mentioned, but not enough to offset the ups and downs, including the project loss that we discussed on the biomass project in PGG. So we are comfortable with the lower end of the guidance range without a project settlement. And if we can conclude a settlement with the customer by the end of the year, perhaps the upper half of the range. Tony?

I don't have a whole lot more to add. I just would mention although we are extraordinarily pleased with the performance of the Nuclear Operations group, we did have more long lead time material fall into the quarter than would be typical. So that was a benefit within the quarter. It is a bit ahead of what you would expect to see, we'd expect to see for the balance of the year. And so we put all that together, on balance we are comfortable where we are right now as Jim has already indicated.

Got it. That's very helpful. And the second question I had was more on the macro side. Jim if I try to read into your earlier comments on the coal power plant side, we have seen a couple of utilities through this earnings period as well as really following Obama's comments really announce some coal power plant retirement scheduled for 2015. In the past you have talked about coal power plants retirement being more focused on some of the smaller plants. Has anything incrementally changed in terms of the utility headlines you have seen so far or is your view largely intact?

Our view is largely intact. A couple of the power plant retirements, especially the supercritical units, were a little bit surprising to us, given market conditions. We'll see if those units actually come offline or they are moth balled so that they can come on line as gas prices rise and electricity prices rise moving forward. But largely, our expectations remain intact and we continue to see some upside in PGG going forward, but it is not quite the robust market we'd all hoped for a couple years ago.

Got it, thank you very much.

Andy Kaplowitz from Barclays.

Hey guys, how are you? Jim, so you had a good quarter in bookings here in Power. You talked last quarter about just timing of a few projects, maybe three or four of them. Is that basically what you booked in the quarter, the three or four projects? And would you expect the balance of the year to still be pretty good? Could you have a book to bill of 1 in the second half of the year? Or is it maybe just lumpy here?

It is pretty lumpy. First quarter was light, second-quarter in Power Generation was better as you indicated. As we look forward and try to estimate when various customers are going to make decisions, it's a little bit difficult to predict and we continue to see lumpiness into Q3 and Q4.

Okay. That's fine Jim. And then just talking about the risk on the boiler -- the biomass project you mentioned. 91% done is pretty far. You mentioned it will be done by the end of the year. I sense a hint of conservatism still around the project itself. So maybe you could talk about that. Should we be concerned of still some drag from this project in terms of future issues, even though it's mostly done? Or does it really seem like you've got the worst behind you now?

I'll say we believe that we are properly reserved for the project at this point. That said, it would be better if the project was 99% done than 91% complete. But we do feel good that we are making progress on the project. The majority of the site civil work is now complete. We are finalizing the last of the electrical work and we're moving into start up and commissioning, which is a good thing.

That said, this project very much has our attention. I mentioned that on the core boiler island in the environmental work scopes, we performed that work very well. Where we struggled on this project was unforeseen underground conditions at the site. And then the ripple effects that causes as you try to recover schedule and you try to work various items on site at the same time to play a little bit of catch up.

Okay, well thanks Jim. Your margins were still pretty impressive despite the project. Thanks, I'll get back in queue.

Your next question will come from the line of Jamie Cook from Credit Suisse.

Hi, good morning. And sorry, I just want another clarification on the guidance. If I just look at what you guys did ex-GSI in the first half, it's $1.18 right? And you had $0.20 headwind from a problem project. So that puts you more at $1.38. Your implied guidance in the back half of the year implies at the midpoint, and I understand the puts and takes, of $1.17. I guess I'm trying to really understand second half versus first half what's getting that much worse assuming we don't have another issue on a project.

I'm not sure that anything is getting all that much worse, and without getting my financial book out here to look at the various quarters, I would say the second-half performance should remain fairly steady. But it could be lumpy quarter to quarter where there are timing differences on projects.

One of the things that may be worth mentioning is that we look at our Q2 operating margins, there is an impact for obviously from the loss on that contract. But we also had to adjust our percentage of accounting, the revenue side of the percentage of accounting, so the margins that we earned in the quarter were roughly in the range of 11% for PGG and not higher. So very good performance, but perhaps not as high as some of you may have thought who hadn't thought through the implications of having to adjust the revenue downward in the quarter based on percentage of completion accounting.

In terms of the balance of the year there's nothing that stands out as a specific headwind, if you will, and we continue to see benefits build from GCI. But the marketing conditions are tough, and we are on our internal plan and I think that is probably the most important thing to say and comfortable with the guidance we've given.

I would agree Tony. The only thing I would add Jamie is in particular on NOG. NOG did have a very strong second quarter. Some of that was timing driven, where we had some, as Tony mentioned before, some long lead material move into Q2 that normally would have been spread over Q3 and Q4 and actually some future periods beyond that. So a little bit of it is timing in Q2.

I'm sorry, I might have missed it in your prepared remarks. Did you quantify how much the pull-forward was?

No we haven't.

Can you quantify how much the pull-forward was?

I don't think so Jamie.

But I'm assuming it's material. Or somewhat?

Well it's not insignificant, that's for sure or we wouldn't be mentioning it.

Okay.

But again it is lumpiness between quarters. I think what you should assume is that NOG's results would still have been very good in the second quarter. They were a bit higher than normal because of the extra revenue we generated and margin drop through from that, and I think from that you can presume that if you pull that out in Q3 and Q4, you are on a more normal trend.

Okay, that's very helpful. Thank you.

Will Gabrielski from Lazard, you may proceed.

Just a follow-up on what Jamie was asking on your comments on the Power margin I guess as we think about the back half of the year in PGG though I would assume additional GCI savings. So should we think of that 11% as kind of the run rate, and then start thinking about additional GCI and thinking the margin should continue to creep higher?

Let me take a whack at it. Perhaps Jim wants to jump in afterwards. The long and short of it is, I want to remind everybody that our Q1 -- our operating margin was in the low 7% range in Q1. And we indicated at that time there was timing of project true-ups and a less robust contract mix than we expected in future quarters.

The catch up was in Q2. So I look at it, when I look at it, I put the two quarters together. And again, adjusting for the losses on the contract, both in terms of the bottom line impact within the segment as well as the top line impact, our year-to-date operating margin in PGG is running right around 9.5%. And we expect that margin to perhaps slightly improve in the second part of the year, but when we look at it overall, as we have said, since our guidance when we did our Q4 results, we expect to be in the lower half of the 9% to 12% range due to competitive market conditions and where we are in the cycle and that really remains unchanged.

Okay. And then on the pricing you are seeing in some of these new wins in the power market, I guess an update on what the pricing looks like and specifically in India on the first big win there. What does the risk look like or how do we need to think about that versus your typical terms and conditions on a traditional North American job?

Your first question, it remains a competitive marketplace worldwide for PGG. So pricing has not changed or margins have not changed significantly on the new project wins compared to the last couple of years.

In particular in India, it is our first project. And we would expect and we are paying an awful lot of attention to initial start up and manufacturing challenges as we get our new manufacturing facility online and operational. And you would normally expect a first contract not to be a high-margin contract, and that is the case with this first contract in India.

Not just on the margins, I'm asking more on the terms and conditions around the risk you're assuming, not just on the pricing.

From a terms and conditions, I understand. From a terms and conditions standpoint, it's a pretty traditional work scope for us. It's a boiler island, some environmental work, and site construction. We have a very good partner in Thermax who has an awful lot of experience on the ground in India with the site construction, and they actually have quite a bit of experience in manufacturing in India as well. It is a pretty traditional contract for us if terms of both scope and terms and conditions. That said, each country is a little bit unique from a terms and conditions standpoint. India is no exception.

Okay, thank you.

Your next question will come from the line of Bob Labick from CJS Securities. You may proceed.

Thank you. Good morning. I just wanted to stick with the India for a second, first congratulations obviously on that project. Could you talk a little bit about the environment overall for projects in India and in China, over the next several years how the international PGG is looking right now?

We continue to see upside internationally in PGG. You will see us over the next couple of years continue to focus on building our international team and our international expertise, probably on a regional basis. In India in particular, a little bit of a slow down in India, compared to what we had projected a couple years ago when we initially made the investment in the manufacturing project with Thermax.

That said, there are opportunities in India. For the last year or so it's been very slow. We are beginning to see some of those opportunities open up as the government works through its various internal processes and it frees up both land and coal. Those are typically the two hold ups in India, availability of land, and working your way through the government processes.

And then number two, it seems as if the ability to build the coal plants is sometimes a little bit ahead of the availability of coal to actually burn in the coal plant, and that seems to be catching up as well a little bit in India. So we are hoping to see more projects move forward in the future.

The Chinese marketplace remains pretty steady for us, we have a relatively low market share in China and we seem to be holding that market share. The real trick in Asia and the China JV in particular is our ability to expand work outside China into other markets like the Vietnam contracts we have signed in the last couple of quarters.

Okay, great. Thank you. And then switching gears to capital allocation, obviously you continue to buy back stock. Could you just also update us on the acquisition environment there? And your expected priorities over the next 12 to 18 months for cash flow?

We expect to remain opportunistic in the market from a share repurchase standpoint just like we have been in the first half of the year. From an M&A standpoint, you'll notice we didn't talk an awful lot about that today on the call. That said, we continue to look for opportunities in the marketplace, but we are being pretty conservative and we're being pretty careful as we evaluate those opportunities and look for some specific ones to move forward with.

Great, thanks very much.

Your next question will come from the line of Steve Fisher from UBS. You may proceed.

Nice awards on the Nuclear Operations side. I guess I'm wondering, is there any change in the margins there in the backlog compared to what you are reporting now? And how do these awards affect what your typical Q4 bookings pattern looks like?

On NOG. We are not seeing any change in margins on NOG. We continue to guide folks to the high teens. In that area I know we have been running a little bit better than that, in the low 20s. But the contracts that we are signing that we have signed are very much in line with past contracts.

I think the only thing I have to add is, is just a reminder, the contractual margins are typically a bit lower and the name of the game is really finding ways to take costs out. And we have an incentive to do that and we share that incentive with the customer and it's both parties benefit. So we look at the performance of the business, what we can say is the business is performing very well, the factories are performing very well, we continue to smartly procure material, and that is helping us to achieve the kind of margin performance we have now for several consecutive quarters.

Okay. And then Jim I know you mentioned the process for negotiating a deal with mPower is complex. What are the chances would you say that you can get a deal done this year or is that more a 2014 type timeframe?

We have had an awful lot of interest from partners. We continue to dialogue back and forth with a number of partners.

I would like to get a deal signed in 2013, if we could. I think it's probably going to take us into 2014 to get that done. We have had an awful lot of interest, and the number of interested parties continues to slowly grow, primarily driven by, I mentioned specifically, the small modular reactor mentioned in President Obama's Climate Action Plan. There's been an awful lot of press, particularly in the US, around mPower. If you get a chance, there was a Fox segment that ran on small modular reactors, and the entire discussion centered around B&W's mPower program, so we continue to generate a lot of interest. But it is relatively complex to work through the issues around scope, risk, and liability, and that's what takes the time.

Okay, thank you.

Your next question will come from the line of Rob Norfleet from BB&T Capital Markets.

Good morning and congratulations on a good quarter.

Thanks Rob.

Just a quick question. In terms of Technical Services what other opportunities are you seeing in the market in terms of RFPs that are out there? I know we've talked about Sandia before, are there any other glaring opportunities that you are looking to bid on?

Sandia remains an opportunity for us. Looking forward, it seems to continue to slide out quarter to quarter. But it is large enough, it certainly has all of our attention in the industry.

Nothing else jumps off the page if you look solely inside the DOE world. We continue to look for opportunities to expand TSG beyond the traditional DOE environmental work scopes that we have today. Optional markets would include some international opportunities, as we mentioned before, of perhaps DoD type opportunities, so we continue to look for best chance for us to enter those markets over the next couple of years.

Okay, that's helpful. My follow-up is kind of an old subject. Regarding USEC, the Company recently received some additional funds from the DOE under the RD&D com contract they are working under. Can you discuss what role B&W is still playing with the American Centrifuge Project? And then maybe just discuss in terms of the obligation for the release of the additional proceeds under the original $100 million commitment that you gave, you and Toshiba gave years ago?

Okay. Today we have two roles if you will, in USEC as it exists today. Number one, we have an outstanding equity investment that is still on the books for roughly $19 million in USEC. And number two, we continue to operate USEC's manufacturing facility that's making the centrifuges that are currently being tested. We would expect going forward, assuming USEC finds a way to put together money, customer interest, and government funding, we would expect to continue to operate that manufacturing facility for USEC in the future.

As to the original $100 million that B&W had committed to invest in USEC, of which I believe we invested $37.5 million in the initial tranche, we are not under obligation to invest the rest of that at this time.

Great, that's helpful. Thank you.

Your next question will come from the line of Brian Konigsberg from Vertical Research. You may proceed.

Good morning. Jim, just kind of following onto the commentary you had regarding Obama's discussion in regard to coal, well really I guess greenhouse gases in the future of the US power market, so I'm just curious. It does seem like it will spur additional coal closures and I assume that a lot of utilities are still kind of evaluating it. But do you see relative to last quarter a change in the willingness to proceed with retrofits while that evaluation is make taking place. I'm just curious, has that trajectory that we thought kind of smoothed out or moderated, given that discussion?

We haven't seen a slow down in utility decision making directly tied to the President's Climate Action Plan. Utilities have an awful lot of variables they need to consider as they think about investing in environmental upgrades. Some of them are environmental-driven, MATS, timing of CSPR, perhaps timing of some CO2 regulations in the future. But just as importantly, they're looking hard at individual situations with regulators in various states. So again, they have an awful lot of variables, we haven't seen any change in timing directly as a result of the latest CO2 greenhouse gas push.

Okay. And then just separately, on the Nuclear Energy business, so I think previously kind of discussion was that you are pushing into the US, it is initially going to be a fairly competitive market. You did have a very good margin in the second quarter.

I'm just curious, has your view on your ability to penetrate not as detrimental to the margin profile as you previously thought? Or perhaps you just didn't make much headway in Q2? I'm just curious on how that transpired and how you see that going forward.

We continue to look for opportunities to grow the Nuclear business into the US market. It is a bit of an uphill climb, it's a tough market to break into. It is a very tight market, especially with 4 nuclear units out of the 104 coming offline, not to return in the last six months. So it remains a little tough to get into. We would expect it to be from a timing perspective a little bit up and down. An awful lot of these contracts are medium-sized or larger and they tend to come in bunches for us. So timing is going to be a little bit tough.

Just in general in the Nuclear business, primarily it remains primarily a Canadian business for us. Simply timing in Canada, is there is not an awful lot of nuclear units coming offline to do work right now and for the next two to three quarters. We would expect the opportunities in the Nuclear business, particularly in Canada to pick back up end of 2014, beginning 2015. In the intervening time, it's going to be a little up and down in that business.

Okay, if could sneak one last question. I apologize. You just talked about nat gas, so the percentage of coal fleets running came down quite a bit year over year. So nat gas prices obviously have been coming down over the last couple of months. Do you anticipate your parts and service business on the coal fleets will moderate along with those prices, or do you anticipate still to remain fairly solid?

Yes. So as natural gas price came up year over year, we did see a percentage of electricity generated in the US from coal jumped from 35% to roughly 39% and then we did see a little bit of a corresponding increase in certain of our PGG businesses. As gas has come down a little bit in the last couple of months, we haven't seen a fall off at this point. Unless gas falls down below $3, I would expect to see the coal plants continue to dispatch in front of the natural gas plants. So we haven't seen a significant change at this point.

Great, thank you very much.

Your next question will come from the line of Chase Jacobson from WIlliam Blair. You may proceed.

Hi, good morning. I have a question on GCI. So you were able to find more savings there pretty quickly, but you didn't change the estimate of what the costs would be over the next few years. Does that mean that you're exceeding your costs, that you're beating your cost estimates compared to what you originally thought? And not to down play the fact that you did increase the savings, but do you think that there is room to find more like you recently did?

So we have increased the estimated saving range on an annualized basis in GCI, from $40 million to $50 million. We increased it to $50 million to $60 million. I would hope that there's additional opportunity going forward, we are trying to do two things with GCI. One is drive short-term operational efficiency for sure, but we are really trying to change the culture inside the Company, to continuously look for opportunities to get better and to drive margin. We are beginning to see that impact, thus the increase in the number of GCI dollars we see in '14 and '15.

As to your question on costs, we have been able to implement these cost savings, including the $50 million to $60 million range within our original cost estimate, so it is not going to cost us any more to get these additional savings.

Slightly better performance I would say, and also areas, we're looking more deeply at areas that are not so much labor intensive, such as procurement, in order to drive some savings as well.

Okay. And then on the bid pipeline, was the $2.5 billion number that you gave, was that Power only? And maybe tying into that, how does your extension on Y-12 and Pantex impact at all your positioning or strategy towards going after other DOE sites, like Sandia, which I think you previously indicated that you did expect in RFP sometime later this year?

Well I'll handle the first question. Yes, the $2.5 billion in pipeline is strictly PGG. It's been relatively steady over that period of time. The second question you asked was more about the DOE and the impact of Y-12. I think Jim is better positioned to answer that one.

We have seen the Sandia procurement continue to push out. An awful lot of the background work getting ready for the Sandia procurement has already been done. So the delay in Y-12/Pantex really doesn't impact our positioning or our probabilities on Sandia, as far as we can see.

Okay. Thanks a lot.

Your next question will come from the line of John Rodgers from DA Davidson and Company. You may proceed.

Hi, good morning. Just a little bit of clarification, if I could. In terms of the PGG margins that you talked about being at the lower end of the 9% to 11% range this year, with GCI does that range change potentially for 2014?

I think the short answer, first of all let me just clarify. The range that we have given is 9% to 12%. We'll be in the lower half of the range rather than 9% to 11%, it's 9% to 12%. Yes, there could be a slight impact next year, but again the market conditions are competitive and we are at a point in the cycle where we don't have as many project close outs. So to answer the question, there could be some improvement, but I wouldn't expect it to be dramatic.

So the $50 million to $60 million in annual savings, I mean, I'm just trying to understand how and when we are going to start to see that offset sort of the market conditions. And it sounds like it will be more on the government side of the business? At least in the near term?

It is corporate, it is in the Nuclear Energy Group, and certainly a fair share of it is also in PGG. So it is spread out.

I would say even in 2013, where we had projected a number of $10 million to $15 million and I think we are solidly in that range, some of that savings has dropped into the bottom line and some of it is honestly offsetting some tough market conditions.

Going forward on GCI, again, we haven't done too much yet on the facilities and manufacturing side. We are still in the planning process on that. We'd expect those dollar opportunities or those dollar savings to drop to the bottom line late 2014, early 2015, so there is a little bit of a timing issue here on GCI as to when you're really going to see it hit the margins.

That and the manufacturing improvements Jim referred to will impact the commercial segments.

Right.

Okay. I appreciate that. And one other question if I could. Jim, in terms of your comments on the acquisitions, could you maybe give us a little bit more color on the market segments that you are looking at?

We have had a little discussion on that before.

Yes.

We certainly, I think we have a good handle on our core competencies, and what we are good at. We tend to play in the high technology sector, we are strong in the energy and the defense markets. We are very good at large, integrated project management, so long as we stick to our knitting and what we are very good at. And we have a good relationship, long-term relationship with the US government. So there is a list of some our core competencies in place today.

As we look at various acquisition opportunities, which we continue to filter through and we're pretty conservative in making sure that we find something that is truly going to add value to the shareholders, and it is a better deal for the shareholders than simply buying back our own stock, we are going to look in those areas where we are good. I just walked through what I think our core competencies are.

So that is very much where we are focused. If there is one unifying theme to all of our core competencies or even if you look inside the various businesses that we have today, is we have a bit of a precision manufacturing angle. Most of the businesses that we're in, where we are performing well, we do some sort of high-tech engineering-based precision manufacturing. And we would tend to stick to our knitting there as well as we look for opportunities to grow.

Any preference private versus public sector at this point? Or just depends on the opportunity?

I think it depends on the opportunity.

I agree with that.

Okay, thanks. I appreciate it.

Your next question will come from the line of Martin Malloy from Johnson and Rice. You may proceed.

My questions have been answered. Thank you.

Thanks Marty.

Your next question is a follow-up from the line of Will Gabrielski from Lazard. You may proceed.

Thank you very much for taking my follow-up. I'm wondering Tony, can you talk about cash generation through the rest of the year and what you are expecting there? And any additional maybe working capital efficiencies you guys are pursuing?

Sure. Well I've said this before, but just to make sure we are clear on this. We are heavily back-end loaded typically in our cash generation. There is some government retainage that frees up in the fourth quarter typically of each year. So the fourth quarter of every year is really the strongest quarter for us cash flow wise.

A couple of quarters ago, I think the question was raised and I said that I thought that our free cash flow for the year would be in the range of $125 million to $150 million. We are still comfortable with that range, and I would tend to say right now more likely at the higher end of that range for the full year. And you can do the math to sort of extrapolate where we are year to date Will, in order to get to those full-year numbers.

Just to be clear that $125 million for $150 million, that also includes your cash pension contribution, is that correct?

Correct. Well it's net of those contributions, right.

Right, so net of the cash that also goes out the door. Okay. And then on the Nuclear Energy segment, I guess in general you are talking about not a lot of great visibility in Canada in the near term and pursuing opportunities in the US, but I'm also wondering around the long-term plan for that business, do you just continue to go as it is? Or do you look to add pieces to that business?

We could. A couple of comments on the Nuclear Energy business. One is we could add some pieces to that business. If we were going to do that, again, we'd tend to look to the engineering and the high-tech higher-margin sectors of the nuclear marketplace. Could be opportunities of the US, could be opportunities in the rest of the world. One.

And number two, long run for the NE business is going to be very tied to the success of mPower. The NE business will be doing the manufacturing for mPower of the module itself, and the NE business will be making the fuel for mPower going forward. So there is quite a tie and an upside opportunity in the Nuclear business to our success with the mPower SMR.

Okay. And then one last one, Tony. Unallocated corporate expense excluding the GCI costs that we back out, how is that going to trend would you say over the next few quarters? Is there still more to go there in terms of savings? Or have we found maybe the level we're going to be at?

You said excluding?

Excluding the variable GCI.

Got it. Yes. I think they'll be flat to possibly slightly trending downward. But a number of the actions that we have taken already have impacted the -- have involved some actions of the corporate office. There is nothing major planned that I'm aware of as you look out over the next couple, three quarters, so should be relatively flat with where we are today and not too much change.

Okay, thanks guys. I appreciate it.

Thanks.

At this time, we have no further questions in the queue. I'd like to turn the call back over to Jenny Apker for your closing remarks.

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. Thanks and goodbye.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the presentation and you may now disconnect.