BWX Technologies Inc (BWXT) 2014 Q3 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Babcock & Wilcox Co third-quarter 2014 earnings conference call.

(Operator Instructions)

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, Gary. Good morning, everyone. Welcome to Babcock & Wilcox Company's third-quarter 2014 earnings conference call. I'm Jenny Apker, Vice President, Treasure and Investor Relations at B&W. Joining me this morning are Jim Ferland, B&W's President and Chief Executive Officer; Tony Colatrella, our Senior Vice President and Chief Financial Officer; as well as John Fees, Chairman of the B&W Board of Directors, to talk about our third-quarter earnings and provide some additional information on the planned spinoff announced yesterday.

Many of you have already seen a copy of our press releases, which we issued late yesterday afternoon. For those of you have not, they are available on First Call and on our website at Babcock.com.

During this call, certain statements we make will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press releases. 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 reports 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 results and 2014 outlook to supplement the results provided in accordance with GAAP. It should not be considered superior to, or as a substitute for, the comparable GAAP measures. B&W believes the non-GAAP measures provide meaningful insight into the Company's operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding B&W's ongoing operations. A reconciliation of these non-GAAP measures can be found in our third quarter earnings release issued last night and in our Company overview presentation, which was posted on our Investor Relations 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. Then you are, of course, welcome to get back into the queue. With that, I will now turn the call over to Jim.

Thanks, Jenny. Good morning, everyone. Today we plan to discuss our third-quarter earnings as well as the announcement we made late yesterday in regard to our Board's authorization for Management to peruse the tax-free spinoff of our power generation business to our shareholders. John and I will share with you more details on this milestone decision after a discussion of our operating results.

Our Q3 results represent a significant improvement compared to the past two quarters and provide important momentum, which we expect to build on over the next several quarters. Consolidated revenues for the third quarter were $737 million and adjusted earnings per share were $0.53. Non-GAAP operating income totaled $85.6 million for the period. Not only is NOG continuing to perform at a high level, but we believe that PGG is turning the corner and showing improved revenue and operating margin.

For the full year of 2014 we expect revenue will be approximately $2.9 billion and adjusted EPS to be in the range of $1.75 to $1.85, a narrower range with a higher midpoint than previously forecast. While we're pleased with these results and believe they represent a significant step forward for the Company, we remain focused on executing our efficiency and cost improvement programs and expanding PGG's international and renewable reach to ensure sustained revenue and earnings growth in 2015 and beyond.

In the third quarter, our nuclear operations segment recorded the strongest third-quarter revenue and second-highest Q3 operating income in the segment's history. Consistent execution and a commitment to continuous improvement are keys to the strong performance of this business.

The power generation group produced sequentially improving revenues and operating income, and importantly an improved 8.8% operating margin. Bookings in the quarter were fully in line with our expectations, but were lower than in Q2, which included major international coal and renewable bookings. At approximately $2.9 billion the bid pipeline had increased noticeably in the past quarter, reflecting the additional opportunities we are pursuing mostly in international markets.

There remain a number of large international fossil and renewable projects we expect to book in Q4 and subsequent months that will contribute to our back log in international growth. We continue to expand our international business development activities with a recent hirer in the EU and continue to work in Asia, which are markets where we see considerable opportunity.

Consistent with the comments we made last quarter, we expect power generation revenues in 2015 will grow by at least 10% exclusive of the full-year MEGTEC revenue contribution. The integration of MEGTEC is on track, and we're starting to realize the revenue synergies we had anticipated. Further, we believe the industrial and environmental market provides an attractive platform for expansion, both organically and through acquisition.

Turning to the nuclear energy segment, which reported its strongest bookings quarter and four years, most of the bookings in the quarter related to outage or refurbishment work for the Canadian utilities, our core business. With the planned refurbishment of 10 Bruce Power and OPG units over the next 15 years, we believe this business will generate annual revenues of at least $150 million to $200 million. Third-quarter results for this segment were impacted by the timing of service outages, which are expected to pick up a Q4, indicative of the seasonal nature of the business. E3 structuring is progressing as planned, and we continue to expect roughly breakeven results this year and a 10% operating margin in this business by the end of 2015.

We're beginning to gain traction on the rebuilding of our technical services group. TSG is actively perusing more than a half dozen business development opportunities in the US, Canada, and the UK. The largest of these opportunities is the O&M contract for the Chalk River National Lab in Canada, which fits well with our experience managing high-consequence nuclear facilities and could be awarded as early as mid 2015.

In regard to mPower, we remain on a $15 million annual spend rate, and we continue to pursue additional investors and other opportunities to help fund the design certification preparation.

Now Tony will discuss the segment results and other financial matters, after which John and I will follow up with comments regarding the planned spinoff.

Thanks Jim. Revenues in the power generation segment for the third quarter of 2014 were $402 million compared to $427 million in the third quarter of 2013, a decrease of approximately $25 million. This reduction reflects $45.2 million lower quarter-over-quarter revenues in our new build, steam generation systems business primarily related to the timing and level of utility boiler and renewables projects. New build environmental revenues decreased $22.8 million, reflecting both the completion of projects underway last year and continued uncertainty regarding the impact of future environmental regulations.

Revenues in the aftermarket services business decreased modestly, by approximately $9.9 million, reflecting a steady replacement parts business offset by timing of service projects, primarily in the Canadian market, while MEGTEC contributed $48.9 million of revenues in the quarter. Power generation bookings in the third quarter were $320.1 million, an increase of $49.9 million from a year ago. Backlog in power generation exceeded $2.1 billion at the end of the third quarter of 2014, in line with our expectations and roughly unchanged from the backlog at September 30, 2013.

Operating income in the power generation segment, including the equity income of our global joint ventures, was $35.3 million in the third quarter of this year compared to $38.3 million in the prior-year quarter, primarily due to lower revenue as previously discussed. Operating margins in the quarter improved to 8.8%. This was driven by favorable contract performance, together with lower SG&A and overhead expenses due to our ongoing cost savings initiatives.

MEGTEC contributed $2.7 million of operating income in the quarter. This was net of a $3.4 million of amortization expense recognized in the quarter, as results were impacted by a significant level of intangibles amortization, which is required under US GAAP to be recognized in the first year of post acquisition.

The nuclear operation segment reported record third-quarter revenues of $297.5 million, an increase of approximately $15 million compared to $282.1 million in the same quarter of 2013, primarily attributable to increased manufacturing activity. Nuclear operation segment operating income was $61.9 million in the third quarter of 2014 compared to $63.8 million in the prior-year period, which was a record quarter for earnings. Backlog in nuclear operations at the end of the third quarter of 2014 was $2.4 billion, roughly unchanged from the same period last year.

Nuclear energy segment revenues were $21.5 million in the quarter, a decrease of approximately 59% compared to revenues of $52.5 million in the corresponding period of 2013. This reduction in revenues is primarily due to Management's decision to exit the low-margin nuclear projects business earlier in the year and the completion of two steam replacement steam generator equipment contracts that were ongoing in the prior-year period.

Operating income decreased by $6.7 million to a loss of $6.7 million in the quarter compared to a breakeven operating income in the third quarter of 2013, reflecting both the completion of the two replacement steam generator projects that were ongoing last year and $4 million of warranty improvements recorded in the third quarter of 2013. Nuclear energy bookings this quarter totaled $100.8 million compared to $34.7 million in the third quarter of 2013. Backlog as of September 30 was $273.4 million, an increase of approximately $88 million as compared to $185.6 million a year ago.

Technical services segment revenues in the third quarter of 2014 totaled $20.2 million, a decrease of approximately $5 million compared to $25.2 million in the corresponding period of 2013, primarily attributable to the termination of the American Centrifuge manufacturing program due to funding limitations. Operating income decreased $13.4 million to $5 million in the quarter. That compared to $18.4 million in the corresponding period of 2013, primarily due to the loss of the Pantex and Y-12 contracts and lower fee income resulting form the impact at various sites of the waste isolation plant drum containment issue.

mPower segment operating loss improved $20.5 million to a loss of $5.1 million in the quarter, compared to a loss of $25.6 million in the same period of 2013, due to the slowing of the pace of development related to the restructuring that we undertook of the mPower program earlier this year.

For the third quarter of 2014, the Company's effective tax rate was approximately 25.5%. This compares to 30% for last year's third quarter. The effective tax rate for this period was lower than our statutory rate primarily due to the impact of an $18.6 million gain from the exchange of our USEC preferred equity investment for new Centrus Energy -- this is the successor company to USEC, notes and common equity post emergence from bankruptcy. We were able to utilize a valuation allowance established when we recorded impairment charges on our USEC investment in both 2012 and 2013, and as a result no tax provision was recorded in this quarter for the gain. We expect B&W's non-GAAP affective tax rate for the full-year 2014 will be approximately 32%, consistent with our previous guidance.

The Company's cash and investments position, net of restricted cash as of September 30, 2014, was $220.5 million, a decrease of $140.8 million compared to last year's $361.3 million at the end of the third quarter. Third-quarter cash flow reflected a net source of cash from operating activities of approximately $81.3 million before pension contributions of $34.1 million and tax payments of $24.7 million. On a year-to-date basis we utilized approximately $183 million of cash and revolver capacity to fund our share repurchase and dividend programs and contributed $63 million to our pension and post retirement plans.

Now let me turn the call back over to Jim for a discussion of the proposed spinoff we announced late yesterday

Thanks, Tony. Since becoming a independent company in 2010, the B&W Board of Directors and Management have successfully perused and capitalize on a number of opportunities to improve performance and increase long-term shareholder value. Over the past 2.5 years, we've taken several meaningful steps to enhance shareholder value, including cost reductions through our GCI initiative and margin improvement programs, derisking the mPower program, the initiation of a dividend, and the repurchase of more than $400 million of our common stock.

With yesterday's announcement of our intention to spinoff the power generation business, we are taking what we believe is an important step in our efforts to unlock even greater value for B&W shareholders. From my perspective, I believe this is the right decision. I look forward to leading B&W through the spin and our power generation business thereafter.

With that let me turn the call to John.

Thanks, Jim. The B&W Board has taken a thorough look at a broad range of strategic opportunities to optimize each businesses ability to grow and increase shareholder value. It is our belief that separating the power generation business and the government nuclear operations business is the best option to accomplish these objectives.

Spinning off of the power generation business will establish two, strong, independent public companies that will benefit from independent management teams each equipped with the resources, strategic autonomy, and financial flexibility to create significant long-term value for their respective shareholders.

We believe that the spinoff will result in material benefits to the standalone companies and our stakeholders. Among those benefits for each business include increased flexibility to deploy and execute a focused capital structure consistent with the strategic priorities of each business. Secondly, a clear investment thesis and visibility to attract a long-term investor base suited to each business. Finally, a greater management focus with incentives that are better aligned to execute each company's strategy and operational performance.

The Board of Directors has named Gemini to leadership roles in each of these businesses, and I'm excited about the opportunities that lie ahead.

I would like to speak to the government and nuclear operations segment. This business will operate under the name BWX Technologies, or BWXT, and will consist of the nuclear operations, technical services, nuclear energy and the empire businesses. The BWXT name comes with a rich history and a solid reputation that includes a brand image widely recognized throughout the industry.

I am pleased, after 35 years of affiliation with the Company, to once again become an employee and to serve as the Executive Chairman of BWXT. Sandy Baker, who has more than 40 years of service with the Company and currently serves as the President of B&W's government and nuclear operations group, will become the Chief Executive Officer of BWXT. David Black, also a veteran of the Company, who serves as B&W's Vice President and Chief Accounting Officer will become BWXT's Senior Vice President and Chief Financial Officer.

I'd like to share with you a few thoughts on the future of the government and nuclear operations segment. The government nuclear operations business has specialized in the manufacture of highly engineered, high consequence components for the government and commercial nuclear sectors, and has provided complex multi-faceted services to these same sectors for many years. Post spin, BWXT will continue to fulfil this vital mission. As BWXT, the Company will remain a leading supplier of precision nuclear equipment, components and fuel to the US government. We will continue to provide technical operational management, maintenance and project management services in support of government owned facilities and laboratories as well as conducting environmental remediation and nuclear proliferation activities for the US Department of Energy.

Under the BWXT brand we will work to optimize our investment in the empire Small Modular Reactor Program and to continue to supply precision manufacture components and services for the commercial and nuclear power industry.

With the US government as our biggest, the government and nuclear operations business generates most of its revenue in the US. Our commercial and nuclear energy business, which is primarily based in Canada, services Canada and US utilities. In total, our business employs about 4,700 highly skilled, technical and professional employees. The employment figure does not, however, reflect employees who are members of our US-based joint ventures.

As BWXT, our business has the ability to generate substantial free cash flow and consistent operating margins and earnings while providing visibility and stability for future revenues. In 2015 we anticipate having revenues of approximately $1.4 billion and going in backlog of approximately $3 billion. Going forward we expect to peruse growth opportunities in existing and adjacent markets that apply our proven skills in complex manufacturing and operations. We plan to serve our existing customers well and secure new customers for growth.

I'm both excited and privileged to be given this opportunity to be among the leaders of BWXT. I look forward to returning to my roots and brining my prior experience to this operation. Together with all the employees, I believe we can enhance shareholder value with a focus on consistent earnings and new growth and strong margins.

I will now turn the call back over to Jim to talk about the PGG business.

Thanks, John. As a standalone business, PGG will continue to operate under the Babcock & Wilcox name. With expected 2015 revenues in excess of $1.7 billion, B&W power generation is a leading technology-based provider of advanced fossil and renewable power generation equipment that includes a broad suite of environmental controls and products and services for both power and industrial uses.

Approximately half of the revenue in our business comes from a solid base of recurring aftermarket parts and services, while the other half of the revenue base is more project driven. The power generation business has a worldwide presence with large-scale operations in North America, Europe, and Asia. We have more than 6,300 dedicated, skilled and talented employees in13 countries, not including the employees in our joint ventures in China, India, and Australia.

We expect that B&W power generation will continue to peruse growth in international fossil and renewables, boiler and environmental controls markets, and through expansion of our new industrial environmental platform. As a standalone company we are well positioned to move into a consolidating North American and European coal market and to focus strategically, via either acquisition or strategic partnerships, to expand global reach and move into select adjacent markets.

B&W has superior technology, a comprehensive suite of products and services and a brand name that is attractive to customers worldwide. We are rapidly enhancing our cost competitive manufacturing and engineering capabilities and streamlining our global cost structure. We believe that we're well positioned to capture value from our existing, North American base while positioning the new B&W for growth with our traditional coal and renewable technologies internationally in our existing and new industrial environmental platforms worldwide.

Upon completion of the separation I've been asked to service the Chairman and Chief Executive Officer of the new Babcock & Wilcox. I'm looking forward to leading a company with an incredible heritage into a very bright and challenging future. Jenny Apker, B&W's current Treasurer and Vice President of Investor Relations, will become Senior Vice President and Chief Financial Officer of the new B&W. Randy Data, PGG's President and COO, will work with me in the coming months and plans to transition out of the Company shortly after the spin.

I'm looking forward to the opportunity to lead and grow this 145-year-old Company through this exciting time of international expansion and growth.

Tony Colatrella, B&W's current Senior Vice President and Chief Financial Officer, will also leave B&W once the separation is complete. I'd like to take a moment to thank Tony and Randy for their outstanding leadership during my tenure at B&W and for their continuing support as we pursue the spinoff of the power generation business over the coming month.

The Company will provide additional details about the Board and Management teams in the coming weeks. Post spin, both companies will have strong balance sheets and be conservatively capitalized with ample liquidity and debt capacity to pursue their individual strategic objectives. B&W power generation is expected to be spun off with no outstanding debt and sufficient domestic and international cash to pursue its growth strategies. While BWXT will also be well capitalized, providing a solid base from which to grow.

Regarding capital allocation for the period from now through the effective date of the spin, we expect to maintain our current quarterly dividend through the spin date, and we will continue to evaluate additional share repurchase activity. With regard to the separation process, the proposed spinoff is subject to various conditions, including SEC approvals, regulatory review by the Nuclear Regulatory Commission and final approval by the B&W Board of Directors. We expect this to be completed by mid-summer 2015.

One-time separation costs are expected to be less than $55 million after tax. In addition, we're focused on minimizing incremental standalone costs as we move forward. As we work toward achieving this next milestone in B&W's history, we will continue to focus on our customers and executing our business priorities for 2014 and caring our positive momentum into next year.

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

(Operator Instructions)

We have our first question a line of Tahira Afzal of KeyBanc.

Thank you very much. First of all, congratulations on being back on track in performance.

Thanks, Tahira.

Jimmy, all this confirmation of information at us at two question not been asked, but I'll start with two and follow up later. Number one, clearly in the power side, very strong quarter. The implied fourth-quarter guidance does indicate you see slightly lighter lumpiness, as so could you talk a bit more about that and how you build up from that into the 2015 framework that you've given?

Sure, Tahira, thanks. I'll start off a little bit on Q3 earnings, move into Q4 and talk a little bit about 2015 for PGG. We did, we had a very strong quarter in Q3. Operational performance in the power generation group was good. We did have $0.03 or $0.04 of upside, in particular some project close outs on some projects that are going very well, moved from what we thought would Q4 back into Q3. That accounts for a little bit of the strong Q3 and what could be seem to be a little bit of a difference for Q4.

As we look into 2015, when we've talk in the past about a minimum 10% growth in revenue in the baseline power generation business, before we consider the additional revenue for MEGTEC. We continue to see that. We can see it in our backlog. We can see it in our bookings, and we continue to feel good about 10% plus growth in the core business going forward.

On past calls we've also discussed targeting a 9% operating margin in the power generation business for 2015, given our recent performance we continue to believe that's a very achievable number.

Got it, okay. Second question, and really congratulations to all of you who are moving on into your new positions. Tony, thank you for all the support and help you've provided over the last few years.

If we look at the tax-free spinoff, could you talk a bit about the ability to hold onto the tax-free status, to the extent you can? If someone does pop in between now and mid 2015 and look at one of the segment, one of the spec companies as a potential purchase? I did notice that the structure your setting up, in terms of the split with the nuclear ops and your government and commercial nuclear stuff being classified as one company, it falls in tandem with one of your private, larger competitors and contractors out there and partners. Would love to get a bit more of a the sense on how you've chosen to really split these two companies up.

Sure, Tahira. I'll start off and then I'll ask John to jump in. In regard to the tax-free nature of the spin, we feel very comfortable that the businesses will spin tax-free to our current B&W shareholders. We've stated in the past and will restate that the businesses are not for sale, so we don't see any risk to the tax-free nature of the spin.

In regard to power generation spinning and in essence the rest of B&W remaining together, first, that's a logical structure. Power generation is a competitive commercial business as opposed to the two government businesses that clearly belong together. Energy and TSG are inter-reliant on one another. Probably, the question for folks would be a little bit around the NE business.

In our view, NE is strongly tied to the nuclear experience and expertise that exists in TSG and NOG. Certainly, if we can find a way to the pick mPower up in the future, mPower's viability and our ability to manufacture components and design components for that business is dependent upon the skills that exist in NOG and the steam generator skills that exist in the commercial NE business in Canada.

From my perspective, it was pretty clear that power generation is certainly large enough, strong enough, capable of standing on its own. Its business model is sufficiently different from the remainder off B&W that it makes sense for PGG to go one way and the rest of the businesses to stay together moving forward.

Tahira, this is John. I agree with what Jim said. We had made some moves prior to this announcement to align the businesses that will remain as BWXT in prior periods. The intent there was to really try to get things together that really belong together. They do similar things. They have similar, of course, skill sets. The ability of that talent to work across the product lines is much more evident over there. PGG, really, is a very standalone entity in many respects relative to its markets, its technologies, and really its opportunity is being focused much more internationally.

Thank you, folks.

Thank you.

Thank you for your question. The next question is from the line of Andrew Kaplowitz of Barclays.

Morning, it's Vlad Bystricky on for Andy.

Morning

PGG margin was up nicely in the quarter, and I know you talked about a couple of close outs and I know you've been working on taking costs out for the last couple of years. Can you talk about what, anything that you were doing differently in this quarter that really drove that uptick? Is this really just starting to see the fruits of all the cost take-outs you've been working on?

Sure, I'd be happy to talk a little bit about PGG Q3 earnings. As you mentioned, there were some project close outs and that due to good project performance that we had anticipated in Q4 that moved back into Q3, say roughly $0.04. If that $0.04 had stayed in Q4 instead of Q3, it would have taken the PGG margin from roughly 8.8% to about 8% or the high 7%s. Still good performance and still a significant improvement over the first half of the year.

Your are correct, there are a combination of things that have come together to help power generations margin. One, operational performance. We are absolutely focused on performing for the customers We've worked off that one bad project that we had. We're performing quite well, operationally.

Number two, absolutely, we're beginning to see some of the upside benefits from the cost take-out and the efficiencies. We would expect to see that continue and even accelerate as we move into mid and late 2015.

And we did benefit from somewhat higher volume, as well, this quarter.

Tony is correct. We did have a little bit of a volume pickup in the quarter as well.

Okay, that's help. Then maybe just sticking with PGG. You've talked about ramping your ability to pursue international power projects in PGG. Can you give us an update on where you are in the process of expanding your global business development infrastructure and maybe give us some color on any traction or challenges you're seeing as you pursue international opportunities?

I'd say we do continue to -- Elias Gedeon, as I've mentioned before, is on board and he's beginning to get significant traction for us. I mentioned on the call that we have added a higher-end business development expert in Europe, as well, who brings to us not only knowledge of specific projects but more importantly knowledge of customers and potential customers. As we look to grow internationally, a lot of the projects we're going to be pursuing, whether they're fossil-based or whether their renewable waste to energy, are larger in size. A lot of those take some time to develop.

We have some inherit advantages in the marketplace. We have a superior technology. We have an ability to deliver internationally. We have the strong B&W name. The one area we're really trying to improve is customer relationships and relationships with potential partners. That's really the focus of the Elias's efforts in his now developing team.

We're beginning to see that pay off. We mentioned a big pipeline of $2.9 million as compared to $2.6 billion last quarter. That $300 million change is primarily larger scale international projects that we're now pursuing.

Jim, if I could just add one other point. We're also benefiting, as we've said in last quarter, from taking advantage of our global manufacturing supply chain, specifically in low-cost countries where we do have a very strong presence now.

Tony is correct. To be a little bit more specific even than that, we've been working hard to bring our India facility online. We believe that will provide, long term, a competitive advantage for us in the marketplace, both in terms of ability to manufacture components cost effectively, but also the ability to design and engineer components. That upside is playing out. A couple of the recent large objects that we've already announced, we plan to manufacture out of Indian. Two or three of the larger projects we expect to pick up in either Q4 or very early in Q1 2015, we plan to utilize the India facility as well.

Okay. Thanks, I'll get back in queue.

Thank you for your question. Next question comes from the line of Brian Konigsberg of Vertical Research.

Good morning, everyone.

Morning, Brian.

Just on touching a little bit more on international power. It sounds like you have a fairly decent position, but how would you characterize the competitive environment? Is it a more difficult environment for you and has it become a little bit more challenging to hit your operating margin targets with more international in the mix, or is the profitability on those similar to what you are used to domestically?

Thanks, one question on market and one on margins. We do see some strength in the international marketplace. You can see the big pipeline's improved, part of that is because I think we're doing a better job of pursuing opportunities. Part of it is because there is a relatively stable market internationally. I wouldn't characterize it as rapidly improving, but I wouldn't capitalize it is deteriorating either. Targeted in the right places, we think there's an awful lot of opportunity internationally for PGG.

In regard to international projects and what sort of margin can we expect? Fair question. We are being very careful as to what types of projects we target and in what countries we target those projects. Typically, a project that's going to be competitively bid among many, many bidders is not as attractive to us. As opposed to a project that is a little bit more relationship driven, a little bit more technology driven. We tend to do better in those markets and those are the types of opportunities that we're pursuing now and will continue to pursue as we move forward.

We think the larger international projects, particularly leveraging our Asian/ Indian manufacturing base, will result in competitive margins and margins that are in line with what we expect to make in the broader business

Another of the projects, also, that we're seeing on that renewable side, certainly, their competitive, but the number of competitors who can effectively compete against us, against our technology and our cost platform, actually, are generally very relatively limited. It's typically one or two others that, on a given project, at most. We feel pretty good about that, too.

Great. If I could just add a follow up on? With the expect to growth in power gen, balancing that with the opportunities you do see in the pipeline to build up more work, do you think that you could have backlog growth in 2015, just given the dynamics? I know maybe it's a little bit early to tell, but is the opportunity there to grow backlog?

I believe the opportunity is there. That's certainly the goal. That said, we're not going to chase projects just for backlog and revenue. Your question about margin is very applicable. We have to make sure we can deliver and that we can deliver at a fair margin. I think we have a reasonable opportunity to grow back log as we move into 2015

Thanks a lot. I'll pass it along. Thank you.

Thank you for your question. The next question comes from the line of Robert Norfleet of Alembic Global Investors.

Great. Congratulations on the quarter and on the news of the split.

Thanks, Rob.

Just a quick question. I know you answered this in a couple ways, but I just want ask in a different way. On PGG, clearly it's within the portfolio that exists today. It's always the more cyclical business in the portfolio. I understand the 50% recurring revenues in aftermarket as well as the growing international portion of the business. Yet, you're still tied to the CapEx cycle of utility customers just to some degree. Jim, I guess my question to you is, how do you feel about the portfolio today, in terms of being able to manage to the volatility of those in markets and not having the stability in cash flows of nuclear operations to support the business in a more volatile environment?

It's a fair question on PGG. The aftermarket business does provide an awful lot of stability. We do have some exposure, as you mentioned to utility CapEx budgets, in particular, in regard to new environmental build out in the states. That said, although the aftermarket business in North America may move a little bit up and down, depending upon market conditions and utilities CapEx decisions, coal still generates 35% to 40% of the power in the US, and its going to for the next 5 or 10 years. Even if 15 years from now it only generates 25% or 30% of the power, it's still a pretty good aftermarket and recurring revenue and margin business for us.

North American aftermarket, we see being relatively stable. We've talked a lot about structuring the Company going forward to recognize the stability in North America, to recognize that it's not likely to be a growth engine necessarily, and making sure that we have a company that's structured to reflect that reality. That said, we see an awful lot of diversification upside opportunity internationally. When we say internationally, we mean both in Asia for fossil and renewable type work and in Europe, primarily for waste to energy and aftermarket services.

Power generation, I think we have a pretty good base in North America. We might even pick up a little bit of work on environmental side, depending upon market conditions and what the EPA does with some rules. We see upside in Europe going forward, and we see upside in Asia.

Those three different markets and opportunities provide some diversification and balance, and now we've added MEGTEC to the portfolio, which is a $200 million plus business, very stable. I would argue a lot of growth upside for us as we move forward.

We think we have a pretty nice suite of products and technologies in geographies in power gen, as we move out on our own in the coming few months.

Okay, great. Just one follow up for Tony. After the split, how should we look at the outstanding pension liability? Is that largely going to be held at BWXT?

No, it will actually end up being split. It's pretty well defined anyway, now, between those folks that work in the power generation business and then those that work in the nuclear operation group. The split, roughly, will be 50/50. It's still TBD a little bit, but you should think of it, roughly, as it will easily split and relatively easily to track going forward, as well.

Great. Thanks again and congratulations.

Thank you.

Thank you. The next question comes from the line of Bob Labick of CJS Securities.

Good morning. Jim, you touched on it in your remarks at the end there a little bit, but I was hoping you could be a bit more specific. Could you talk about the optimal capital structure for each entity, and how long it will take to accomplish that post spin?

I can make a couple comments on it. We've gone ahead and we've announced the spin. We're continuing to work internally to determine exactly what the right capital structure will be for both businesses going forward. I mentioned that it's likely power gen will spin with no debt. There's still a cash position to be determined for both companies going forward. I'd say it is a little bit of work in progress.

The fundamentals for us are clear. Our desire is to spin two very stable, well-capitalized businesses. We think we're well positioned to do that with the minimal debt we have on the balance sheet today and the cash flow that we generate internal to the business. As to the exact numbers and structure at the split and for each business going forward, we'll probably leave that to update in the coming couple of months.

Okay. You talked about, obviously, we spent a fair amount of time on the international drivers for PGG on the call. I was hoping maybe you could remind us and just talk about the next few year's growth drivers for BWXT? Obviously, excluding the Ohio Class when that comes on. What are the other -- we've looked at that as more of a steady state cash flow business. What are the other growth drivers and opportunities for that new entity?

Hi, this is John. We have, obviously, a good stable platform of a business, but we are pursuing growth, As Jim indicated in his remarks, we have an expanded bid base that we're doing in the government services area. Jim mentioned Chalk River, an exciting opportunity for us. There's a series of opportunities in the US that we're aggressively pursuing. We really want to get more strength in there and the diversity of customers in that business beyond the Department of Energy, so that is well underway, heavily being pursued.

There are some things we can do in adjacent markets to what we currently do. I'll give you one example. There is a program to build missile tubes for the next-generation ballistic missile submarine. That's about $1 billion worth of opportunity over the life of that program. We are currently in some preliminary bid activity and would expect maybe some near-term awards in there if we're successful. That's an example of something that we're currently not doing in an adjacent market where we could pursue growth.

Those are the kind of the opportunities that we want to pursue going forward into the future. It's just not standing still and looking in the same direction, there are opportunities.

Great. Thank you very much.

Thank you. Next question comes from the line of Martin Malloy of Johnson Rice.

Within the power segment, you've got some ownership of some of your competitors, Foster Wheeler and Alstom and Flux, could you maybe talk about our share your thoughts on potential consolidation?

You are correct that some of our competitors, Foster Wheeler and Alstom, are both in the process of being acquired. I would anticipate those deals, just from reading the press, would close in the next few months. Again, as I said before, we're not for sale. We're not in any discussions with anybody in regard to consolidation. That said, clearly in the North American market over the next 2, 3, 4, 5 years, there could well be consolidation opportunities as we move forward. The market is stable to slowly shrinking, most likely. Those opportunities could be there. Our belief is that the power generation group would be well positioned to talk with anybody about those in the future, but that's not something that's on the radar screen right this second.

Okay. With respect to mPower, could you give us maybe an update there on any potential interest that you're seeing out there from investors, maybe international investors? Is there any activity?

A couple of comments on mPower. One, we do have funding stabilized at $15 million annually at this point. That makes some sense to us. We continue to work with the DOE moving forward. We do continue to engage with various potentially interested investors or partners, both in the US and internationally. If at some point we have something specific to announce, we will. For now I'd just say that there continues to be some level of interest, and we continue to dialogue in the marketplace.

Okay, great, thank you.

Thank you. The next question comes from the line of Steven Fisher of UBS.

Great, thanks. Jim, I know you said in your comments that you're trying to minimize standalone costs. I wonder if you could elaborate that a little bit? I assume what you are trying to get at is how you intend to offset the dis-synergies of having to create corporate overhead structure for each of the separate companies?

Yes, absolutely. We've actually done a lot of work and thinking on this front. It's important to both BWXT and to PGG as standalone businesses that we A, don't increase the base cost structure we have in the businesses today. And B, actually look for opportunities to drive down the cost structure in the short run and in the longer term. Initial work that we've done so far, would say that we're pretty comfortable we're going to be able to keep the cost structures at least flat, post spin, even recognizing that there are clearly some increased costs for having two standalone companies as opposed to one. It's our believe we can keep the cost structures stable. I can tell you over the next few months we're going to be looking for opportunities to even drive the overheads down a little bit.

Okay. So in other words, you add some in one place, but you take them way in another? Is that the concept?

Yes, there are some costs that are clearly going to be added. We have a little bit different management structure, insurance costs change a little bit, we have two listed companies, two independent auditors, those types of things would tend to drive cost up. That said, we're taking a very critical look at our overhead structure, and we're well positioned and ready to make some tough decisions to make sure we have two lean companies moving forward.

Okay. What would you say is behind the confidence that some of these international power bookings won't get pushed out beyond the fourth quarter? I know you're targeting getting some signed and finalized in the fourth quarter.

A couple things. One, we think we're well positioned on a number of these projects. Any of these large projects take multiple months to come to fruition, so there's an awful lot of dialogue that's gone on back and forth on many projects, one. Two, we are pursuing a number of projects, and we're not counting on all of them hitting in Q4 or early Q1 in 2015. Because your statement is accurate. International work, even larger projects in the US have a tendency to push out over time, so we don't have -- we're not dependent upon 100% hit rate. I think we've progressed far enough on a number of these projects where we have a high degree of confidence that we'll see them at the end of Q4 or very early of Q1 2015

Okay, thanks very much.

Thank you. We have the next question from the line of John Rogers of DA Davidson.

Good morning. Couple of things as it relates to the new BWXT and the PGG business, could you talk a little bit about your plans for capital spending with both of those? I guess what I'm asking is, is the expectation -- it sounds like on the PGG business, you've got some opportunities or at least expectations for more acquisitions to add to that power portfolio. I'm wondering about on the BWXT? Is that the thought that that's organic growth and internal investment to drive that?

I'll comment on power gen and I'll ask John to comment on BWXT. In regards to CapEx, a couple of thoughts. Baseline normal CapEx, not acquisition, we don't expect to change significantly between the business units going forward relative to what we're spending today. I mentioned on the power generation side that we have a new facility in India. That facility, for the most part, is built and stood up and the CapEx is already in. We don't expect any change in CapEx for power generation, and we'd expect it to remain relatively low.

In regard the potential for acquisitions in the future, I've talked a lot about the organic growth we expected in PGG and our focus on growing the business using our existing technologies. That said, I do believe there's opportunity for acquisition as we move forward. I believe that from a balance sheet perspective, even though we haven't defined all the numbers at this point, we'll be well positioned to execute on those if we choose.

They could look like an industry consolidation play. That could be an opportunity. It could look like another MEGTEC type deal, where we expand into industrial, environmental, in a new, naturally growing market that leverages the technology base that we have today. I think were well positioned in PGG for both organic growth and/or in growth via acquisition as we move into the next couple of years. John?

I would say a very similar set of comments for BWXT. We have certainly some baseline capital in the business, dealing with upgrades of plant and equipment. I really don't see anything materially changing on that going into the future. All the items that we discussed in the prepared remarks and the other comments I made about the Missile 2 Program, things along those lines or organic. They're bidding opportunities and growing through bidding and capturing additional work in and around markets that we are in or nearby. There's always opportunities for acquisitions. We don't have anything specific right in front of us at this particular moment, but we don't keep our eyes closed to the mark either. If we can do something smart, that creates tremendous shareholder, we will pursue that opportunity. We're not going to acquire just for acquisition sake or volume sake. It would have to be a significant enhancement towards value.

John, that would primarily be government services companies that you would be looking at? I guess I'm thinking more about the commercial nuclear?

It's certainly our core, John. Obviously, we've tried to append some commercial activities with that just to give us little bit more balance in the portfolio things that we've been doing. We've had some limited success in that area, but it would certainly be our intent to stay within our core.

Okay. Then lastly if I could? Quickly did you look at other options besides the break up, and how extensively?

Yes, John, we've looked at options continuously since we stood B&W up as a public company. It's been an ongoing evaluation and we've looked at many, many options beyond the spin. But, at the conclusion at the end of the day, we felt that this was the best alternative to enhancing shareholder value.

Fair enough. Thank you.

Thank you for your question. The next question comes from the line of Adam Thalhimer of BB&T Capital Markets.

Good morning, guys. I just wanted to focus little bit more on Q4, specifically. What could get you more towards the bottom end of the range, towards a $1.75 for the full year? Would it be revenue falling below expectations or margins taking a step back in PGG? Or is there something else that's embedded in your guidance that we should know about?

I would prefer not to be there, and we're certainly targeting the high end. We felt pretty good about Q4 and that's one of the reasons we took the low end off the guidance this quarter. There are always inherent risks in our business. We have project performance issues that could move $2 million or $3 million. We have project close out opportunities. A down side risk would be a project close out opportunity and our ability to release either contingency or warranty shifting from Q4 into Q1, simply because of timing. Those are normal risk and we factor those unto our thinking as we move into the quarter. We fill pretty good about Q4.

Okay. The other question, I just wanted to ask about your thoughts about the buyback between now and the split, middle of next year?

Multiple things for us on that front. We mentioned that remaining opportunity. We'll continue to evaluate the marketplace. I mentioned that we're going to do some more work in the coming months as we think about capital structure, and making sure that we spin two very strong and stable and well-funded companies as we move forward. Then obviously, we'll continue to look at the market price of the stock relative to what we think it's worth. We'll put all those together and decide if it makes some sense for us to enter the buyback market in the next few months or not.

Okay, thank you.

Thank you. We have a question of line of Tate Sullivan of CLSA.

A follow up on the repurchase. So the split process does not prevent repurchases? Just want to confirm that? Can you talk a little bit more of the MEGTEC revenue contribution, is it still -- did you say greater than $200 million next year? Can you just talk about that a little more?

Sure. The spin process by itself does not restrict us from buying back stock if we chose to do so. We just have another set of variables to consider, which is six months or seven months from now, we'll two standalone companies that we want to make sure are very well funded and stable as we move into the future. There's no formal restriction in place on that. In regard to MEGTEC, again, we continue to be very happy with the MEGTEC acquisition. MEGTEC continues to perform at or better than our pro forma projections. We are anticipating MEGTEC revenue of a little bit in excess of $200 million as we move into 2015. We continue to expect EBITDA margins on that business 10% are perhaps even a little bit more.

Just a quick follow up, can you talk -- you'll have no leverage planned in the PGG, but what is optimal leverage of BWX?

Right now, what I indicated we expect to spin power gen group with no debt. We'll work through all the details of that in the coming few months. Then, I'm going to hold comments, for now, on optimal leverage ratios for both PGG and BWXT, but we'll be prepared to talk about that at or prior to the spin.

Okay. Thank you.

Thank you. We have a question from a line of Jamie Cook of Credit Suisse.

Good morning. You guys are keeping it interesting. Most of the questions have been asked already, just two questions. As we think about the split, Jim and John, I feel like both of you are really stressing growth opportunities that both companies can accomplish better as standalone companies versus together. Have either of you sized the market opportunity that you're not addressing right now so investors can a feel for the potential size of the market? John, you mentioned a couple contracts? Jim, you mentioned internationally broadly, but there's no numbers behind it. My last question, Jim, you spoke about power gen and consolidation longer term. You didn't really address BWXT technologies. As I sit here thinking why should BWXT be a standalone company? A much larger industrial conglomerate could easily fund mPower. They would like the higher returns, stable characteristics of the business. So, if you could comment on that? Thanks.

Sure, so let's start off with just size of the growth opportunities speaking from the power gen perspective. We do see a lot of opportunity. We haven't put out any market size numbers internationally. We could, we've certainly done some of that work internally. The market size for us is a little bit of an interesting discussion in that there's some awfully large numbers about power generation market size going forward. There are also an awful lot of opportunities that we're going to decide not to chase in the future, just because we're not sure we'd be competitive and we don't want to be bidding very low-margin projects.

We're still a -- although I think we're certainly of sufficient size to be strong and stable and to be able to bid on what we want to going forward. We're also not so large that we have to chase revenue just to chase revenue. So, we remain very targeted in our markets going forward, which probably makes a little bit more difficult to market size opportunities either for fossil, coal-type work in Asia or waste-to-energy all over the world. We're seeing opportunities in Europe, the US, South America and Asia.

That's a little bit comment on market size. MEGTEC is another very different business model for us. It's a naturally growing market, industrial environmental. We have an extremely small market share with MEGTEC, and that does provide a lot of upside of opportunity for us in the future, but we haven't put numbers on the markets. We'll think about that as we go forward.

Jamie, as far as BWX is concerned, we gave you a little bit of flavor on some of the opportunities in terms of magnitude and size, There is a broader addressable market for the Company that we'll continue to pursue. We plan to give a road show a little bit closer towards the spin. We'll give you a little better insight at that particular point in time about what we're doing in each one of those areas, and be happy to address it in. As far as your concerns about the desirability of BWX, we desire it as well. It's a wonderful business. It has tremendous stability and great cash flow. It's an extremely valuable thing to our shareholders, and we treasure that and our shareholders do too.

That being said, if someone feels that they want to consider that, we're always open to an idea. We have nothing planned at this particular point to somehow sell or otherwise disposition the business. We think we can significantly enhance the value to our shareholders from where we will proceed, and that's our plan.

Alrighty. Thanks. Congrats, I'll get back in queue.

Thanks, Jamie.

Thank you, Now I'd like to the call back over to the Management for closing remarks. Thank you.

Thank you for joining us this morning. That concludes our conference call for the third quarter. Our replay of this call will be for replay 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. We will also be adding, shortly, a deck that's provides a little more information on the spin as we discussed it on this morning's call. Thank you, again, for joining us. See you next quarter.

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