Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Babcock & Wilcox Company (NYSE:BWC)

Q3 2011 Earnings Call

November 8, 2011 8:30 AM ET

Executives

Michael Dickerson – Vice President and Investor Relations Officer

Brandon Bethards – President and CEO

Mary Pat Salomone – Chief Operating Officer

Mike Taff – Chief Financial Officer

James Canafax – General Counsel.

Analysts

Rob Norfleet – BB&T Capital Market

Joe Ritchie – Goldman Sachs

Tahira Afzal – KeyBanc

Jamie Cook – Credit Suisse

Steven Fisher – UBS

Randy Bhatia – Capital One Southcoast

Chase Jacobson – William Blair

Andy Kaplowitz – Barclays Capital

Scott Levine – JP Morgan

John Roger – D. A. Davidson & Company

Operator

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

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

Michael Dickerson

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

Joining me this morning are Brandon Bethards, B&W’s President and Chief Executive Officer; Mary Pat Salomone, Chief Operating Officer; Mike Taff, Chief Financial Officer; and James Canafax, our General Counsel.

Many of you have already seen a copy of our press release issued last night. For those of you who have not, it is available on FirstCall and on our website at babcock.com.

During this call, certain statements we make will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release.

The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our annual report on Form 10-K and quarterly reports on Form 10-Q on file with the SEC, provides further detail about the risk factors related to our business.

Additionally, I want to remind you except as required by law B&W undertakes no obligation to update any forward-looking statement to reflect events of circumstances that may arise after the date of this call.

Also on today’s call the company provides non-GAAP information regarding certain of its historical results to supplement of the results provided in accordance with GAAP. And it should not be considered superior to or substitute for comparable GAAP measures.

B&W believes the non-GAAP measures provide meaningful insight into the company’s operational performance and provides these measures to help investors facilitate comparisons of operating results with prior periods and assist them in understanding B&W’s ongoing operations.

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

The format for today’s call, we’ll begin with some remarks by Brandon about current business conditions and a status of short-term opportunities. Second, Mary Pat will take you through the performance of each of our business segments, followed by Mike who will provide some additional financial details about the quarter. Lastly, Brandon will conclude with some final comments.

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

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

Brandon Bethards

Thank you, Mike. Good morning, everyone and thank you for joining us. Let me start today by describing my view of our performance for this quarter and the business and the current business environment we are experiencing. First of all, I’m pleased to be able to report an 11.8% year-over-year increase in consolidated revenues for the third quarter of 2011.

Operator

You call me [Melanie].

Melanie

Yes. Just a quick comment on the…

Brandon Bethards

Operator, you are on the main line.

Melanie

I sent the e-mail of the order of Q&A people.

Operator

Okay.

Melanie

So…

Brandon Bethards

Excuse me, gentlemen, ladies and gentlemen.

Melanie

… one of our special request upfront, but I’m assuming that otherwise the best item will be in order correct, so for instance...

Michael Dickerson

Okay. Let’s get started again.

Brandon Bethards

Okay. My apologies for that...

Operator

How did that happen?

Brandon Bethards

Let me -- it will give the bears and the eagle fans a chance to catch a quick wink here while we correct this problem. Let me, this is Brandon and let me start over again with the leading comments.

By describing my view of our performance this quarter in the current business environment we are experiencing. First of all, I’m pleased to be able to report an 11.8% year-over-year increase in consolidated revenues for the third quarter of 2011.

This is the fourth quarter in a row for positive year-over-year consolidated revenue growth and the third quarter in a row in which that growth was evident in all four of our reported business segments.

On a consolidated basis, revenues were $700 and $7.6 million, an increase of $74.8 million. I think is also important to note that our consolidated quarterly growth rate has accelerated throughout the year, our reported revenue growth rates over the corresponding prior year period for this year were 4.4% in the first quarter, 9.3% in the second quarter and again, 11.8% in the third quarter.

This is principally a result of improving conditions in the customer demand for fossil and nuclear power generation parts, service and construction projects, as well as our success in achieving decommissioning and decontamination contract wins from the environmental management programs of the U.S. Department of Energy.

This quarter’s ending backlog of $4.75 billion, represents an increase of $289 million or 6.6% from the existing backlog at the third quarter of 2010 and a modest improvement from the existing backlog at the end of the second quarter of 2011.

The normal seasonal decline experienced in the Nuclear Operation segment has been more than offset by a nearly 18% sequential improvement in the Power Generation segment backlog.

Consolidated operating income for the third quarter of 2011 was $57.6 million, compared to $65.1 million in the third quarter of 2010. Included in the third quarter 2011 operating income was approximately $10.6 million related to the accounting for non-cash, non-deductible in-kind research and development costs received by Generation mPower. Mike will discuss this in more detail later. And it also included $3.1 million in the finalization of the Nuclear Energy loss contract that we reported on during the last conference call.

With the output without the impact of these items, operating income was $71.3 million or an increase $6.2 million from the third quarter of 2010. The increase in operating income before items was primarily due to improvements in revenues and operating margins in the Power Generation and Technical Services segments, partially offset by lower operating income in Nuclear Operation segment and an increase in internal research and development expenses related to the company’s modular reactor program.

Next, I would like to address safety, which is you may know is one of the key metrics we used to measure our performance and I’m pleased to report that the company continues to perform exceptionally well. For the first nine months of 2011, the company is reporting safety metrics better than prior year levels and better than our 2011 targets.

For the first nine months, we have reported a loss time frequency rate of 48% below the prior year. The result of such favorable performance is a workers comp rate that we estimate to be approximately 40% below the average industrial workers comp rates generating real returns to the bottom line.

Before we move on to the individual segment discussions, I want to discuss a few initiatives as we move forward that is the American Centrifuge project, the Environmental Protection Agency regulations and the Ohio-Class replacement program.

First, the ACP. As you may have seen a couple of weeks ago on October 31st, USEC or United States Enrichment Corporation announced that they were in ongoing discussion with the Department of Energy regarding the future of the American Centrifuge project.

This was reinforced in the November 4th USEC report on third quarter earnings. It would appear that it is the intention of the DOE to provide funding to [APC] under a research, development and demonstration program.

In connection with this program and at the request of the DOE, we have agreed in principle to extend our Standstill Agreement with USEC until mid-January 2012 subject to further agreement between USEC and the DOE on the initial ACP funding.

It is our understanding that these discussions are continuing to take place. It is our hope that USEC and the DOE find a funding solution to the strategically important program to the United States.

As a point of reference, in the first three quarters of 2011 B&W reported revenues of $23 million related to the American Centrifuge project.

Next relative to the EPA regulations, from a regulatory standpoint we are really in the same positive we were in three months ago. That is to say the Cross-State Air Pollution Rule or CSAPR has been finalized and the Utility Maximum Achievable Control Technology standards or UMAC has been drafted and it’s currently expected to be finalized on December 16th after the one month extension provided to the EPA by the courts.

What has improved is the amount of activity we are experiencing with our customers as they prepare for compliance with these regulations. Over the last few months we have announced a number of environmental technology and construction projects that are indicative of customers moving forward toward implementation.

Our environmental CSAPR team is indicating to me that bidding activity is strong and in fact we are in late stage negotiations on additional projects totally several $100 million. I indicated a large amount of bid outstanding in the last earnings call and I think it is fair to say that we are beginning to see some of those bids turn into awards.

Next as it relates to a segment we don’t talk much about that is industrial environmental product demand. It is interesting to note that B&W has experienced an increase in environmental inquires from industrial customers as they prepare to compile with the boiler MACT, what should be more accurately characterized as the industrial boiler MACT.

The company has a comprehensive suite of technologies available to insist -- to assist industrial customers as necessary to compile with the pending Boiler MACT regulations. During the third quarter, the company has awarded domestic and international industrial environmental projects totaling more than $40 million.

Also, I’d like to point out that the environmental cycle is progressing as we anticipated and as we described a year ago. That is we expected to see awards began to be left in this market segment late this year and that is in fact where we see occurring.

The activity we are experiencing is in line with our expectations and our view of a $12 billion to $24 billion addressable market still remains in place. As this cycle moves forward, investor should first be looking for award announcements and backlog build followed by revenue growth and improvement in market pricing in that order.

So last item I want to discuss before turning the call over to Mary Pat, is the Ohio-Class replacement submarine program. Late in the third quarter, we received an award from the Department of Energy for the preliminary design of the steam generator for the next class of ballistic missile submarines or the Ohio-Class replacement program.

We expect that over the next two years, there will be additional releases of design and engineering awards for the various nuclear proportion components that we will manufacture in the future.

This award is one more indicator that the program continues to move forward. I expect that if the current bill schedule holds, we will begin ordering materials sometime late next year and begin manufacturing in 2014. But we once describe there is a long-term opportunity is getting closer every quarter.

With that, let me now turn the call over to Mary Pat who will take you through the results of each of our business segments. Mary Pat?

Mary Pat Salomone

Thanks Brandon. And I would like to walk you through the results for each of our reported business segments.

Nuclear Operation segment revenues up $254.4 million increase $10.8 million or 4.4% in the third quarter of 2011 compared to the third quarter of 2010. This increase is principally the result of an increase in activity for naval nuclear fuel.

Operating income was $38.1 million in the third quarter of 2011, representing an operating margin up 15%. This compares to a generally unsustainable 18% margin in the third quarter of 2010.

The operating earnings and margin in the third quarter of 2010 were aided by approximately $8.7 million from a favorable contingency resolution at nuclear fuel services in that prior period.

The ongoing strong operating income results were driven by continued productivity and project execution on the production of nuclear reactor component and improvements in productivity and production of nuclear fuel.

Backlog in Nuclear Operations declined likely sequentially as expected. We called this segment typically books the majority of its annual awards in the fourth quarter of the year as it is highly correlated to the annual budget cycle of the U.S. government.

In that regard, early in the fourth quarter of 2011, the company was awarded an annual nuclear fuel and support activities contract totaling approximately $115 million, which is designed to cover the government naval nuclear fuel needs through the end of 2012.

Revenues in the Power Generation segment of $385.3 million for the third quarter of 2011 increased $49.2 million or 14.6% compared to the $336.1 million reported in the third quarter of 2010. This result was principally due to increased aftermarket parts and service, as well as biomass and waste energy new-build power generation boilers and axillaries systems.

Revenues in our new new-build environmental business were essentially flat compared to the year ago period. As the environmental regulations became clear this year with the finalization of the CSAPR and the proposed utility MACT rules and various other state regulations. We have experienced a significant increase in environmental project bidding activity as Brandon mentioned earlier.

As you think about the conversion of awards into revenues, remember that many of these large projects, which may be 18 to 36 months in duration will typically ramp up slowly for a couple of quarters when the detailed engineering and design work is being done. It’s typically followed by procurement, construction and finally commissioning.

Operating income in the Power Generation segment including the equity income of our global joint ventures in that segment was $38.9 million in the third quarter of 2011, an increase of $7.3 million or 23.1%, compared to the third quarter of 2010.

The year-over-year increase in operating income was primarily due to improvements in revenues as I just discussed, as well as improvement in aftermarket services margins and improved levels of productivity throughout the business, particularly in the fossil power and construction.

Backlog in the Power Generation segment increased $267 million or 18.4% from the second quarter of this year and is up 10% from the third quarter of 2010

Bookings up $634 million in the Power Generation segment reached their highest levels since the third quarter of 2007. Obviously, bookings in the period are more expensive than what has been publically announced.

We continue to gain traction in both domestic and international markets. As an example, we recently were awarded a contract to supply a wet flue gas desulfurization system, as well as a dry electrostatic precipitator to an iron mining company in Chile.

We have also developed and supplied to the market technology to deal with coal ash pond cleanup effort, an issue that has recently been receiving a lot of attention from the utility industry and environmental regulatory body.

Nuclear Energy segment revenues of $61.5 million increased $26.8 million or 77.2% in the third quarter of 2011, compared to the third quarter of 2010. The increase in revenues is due principally to the success achieved supplying nuclear components and volume associated with the nuclear project contract.

Operating loss of $37.5 million in the third quarter, include a $3.1 million increase in the costs of nuclear energy project completed in the quarter, as well as $29.5 million of research and development and selling, general and administrative expenses related to the B&W and Power Modular Nuclear Reactor program. $10.6 million of these costs are non-cash, non-deductible in-kind R&D expenses which Mike will further explain in a minute.

The underlying historical businesses are gaining profitable momentum as the company continues to be an important supplier of large nuclear components and is becoming increasingly competitive in the U.S. nuclear services industry.

Technical services segment revenues up $28.6 million increased $6.5 million or 29.4% in the third quarter of 2011, compared to the third quarter of 2010.

Operating income of $20.7 million increased $10.9 million or 111.2% in the third quarter of 2011, compared to the third quarter of 2010. This increase in operating income is due principally to new environmental remediation, decontamination and decommissioning contracts, received in the second half of 2010 and the first half of 2011, principally for the Department of Energy.

Let me now turn the call over to Mike who will provide some additional financial detail.

Mike Taff

Thank you, Mary Pat. Let me start with a discussion of the accounting treatment for Generation mPower. Today, Generation mPower LLC is 90% owned by B&W and 10% by our minority partner Bechtel. Generation mPower is currently receiving research, development and detail design in-kind engineering services from the minority partner.

From an accounting standpoint, the LLC is recording these services of in-kind research and development expenses which is then consolidated on to the books of B&W.

To the extent, that the services received are greater or less than the minority partner’s share of the development cost, recognition of these non-cash, non-deductible in-kind services results in a consolidated net income or loss impact after taking into account the impact of non-controlling interest.

In the third quarter 2011, the value of the in-kind services reported was greater than the minority partner share of the development costs, resulting in non-cash, non-deductible net expense at the operating income lines of $10.6 and a $4.7 million loss at the net income line after taking into account the impact of non-controlling interest.

For the fourth quarter, I expect non-cash, non-deductible, net expense at the operating income line of approximately $6 million and a $3 million, well, at the net income line after taking into account the impact of the non-controlling interest.

As we look forward to the next few annual periods, based on the current LLC projections, I expect the net impact of this accounting to be roughly zero in 2012 and reflect a small net favorable income impact in 2013, over the course of these -- of this program, I expect accumulative net effect to be zero on the consolidated books of B&W.

During the third quarter, the company generated cash flow from operating activity of $6 million, including the impact of pension funding of $94.5 million. The company’s cash investment position net of debt was $357.1 million at the end of the third quarter of 2011 compared to $368.7 million at the end of the second quarter of 2011. In addition, the net cash, the company maintains a $700 million revolving credit facility with approximately $478.6 million of availability as at the end of third quarter.

The company continues to maintain adequate liquidity to fund operation -- to fund operations which could include increased working capital requirements, internal growth and R&D program, as well as additional product and geographic expansion opportunities.

Consolidated research and development expenses was $34.6 million in the third quarter, included in the $10.6 million of in-kind non-cash Generation mPower R&D.

Cash R&D expenses in the third quarter was $24 million, an increase $6.6 million from the third quarter of 2010 and in line with our expectations for the quarter as we discussed at the last earnings call. This increase was principally a result of an increase in spending related to the company’s mPower initiative.

For the full year the company expects consolidated R&D, including the in-kind R&D received by Generation mPower’s minority partner will be approximately $105 million to $115 million for 2011. Our cash R&D expense is expected to be approximately $90 to $100 million for 2011.

Capital expenditures for the third quarter of 2011 were $11.8 million, lower than depreciation and amortization due in part to the timing of expenditures. For the full year, we expect total capital expenditures to be in line with total depreciation, amortization in the range of approximately $65 to $75 million.

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

Brandon Bethards

Thank you, Mike. We talked earlier about the positive developments of our short-term growth opportunities, but there is one other item of interest that I can update you on, specifically it relates to our management and operation contracts at Y-12 and Pantex.

The National Nuclear Security Administration issued a draft request for proposal with a common period that ended in September. The final RFP is expected to be out in the latter part of 2011.

Going of the information contained in the draft RFP it calls for a five-year base term beginning January 2013 with up to five additional years of extension and includes the management and operations of both Y-12 and Pantex facilities.

The RFP is focused on achieving cost savings for the NNSA as a result of combining the two operations and contemplates increasing the scope of operations to include the management of the new Uranium Processing facility at Y-12, as well as the Savannah River Tritium operations.

To accommodate the schedule, the NNSA recently exercised the first of two to three months extension available under the current contracts. We are working with the customer for a further extension of the M&O contracts for these two sites to provide them the time necessary to complete the RFP process.

We believe that given our outstanding performance at these operations and our demonstrated ability to generate cost savings through contract consolidation in other government programs, as well as the significant savings we have been able to generate for the DOE over the last several years, B&W is well-positioned to competitively respond to this combined RFP.

So to summarize, this was a very solid quarter and a situation similar to the position the company was in at the last earnings call. Our underlying businesses are performing well and all four business segments are experiencing year-over-year revenue growth and consolidated earnings growths are continuing to grow as well.

Finally, as I described in detail all area, the company is experiencing positive incremental developments in each of our near-term growth opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Rob Norfleet from BB&T Capital Market. Please proceed.

Rob Norfleet – BB&T Capital Market

Good morning and congratulations on a great quarter.

Brandon Bethards

Thank you.

Rob Norfleet – BB&T Capital Market

Just a couple of quick questions, I guess first of all, as you are looking at the bids that BWC has evaluated over the last few quarters and the projects that you’ve been awarded? How would you characterize your win rate at this juncture and those projects that you haven’t been selected for, has it been just because of price meaning is there some discounting going on with the early phase of this cycle unfolding.

Brandon Bethards

Rob, this is Brandon, and I’ll take a start but just and Mary Pat may add some more precision to my comments. But the win rate would be somewhat similar to what we saw in the last cycle, not up to the average over the complete cycle but close to it in the 20 to 30 trending up.

The -- with regard to the phase that we are in with this cycle, classically you see a lot more intense competitive pressures in the early part of the cycle then you do mid way through. That is not changing. However, I can assure that we’re holding our bidding discipline as we’ve described in the past and we did in the last cycle.

And what we really are selling to our customers is a value proposition that creates value for their operations and we expect to receive a commensurate type reward for that type of service and product.

Rob Norfleet – BB&T Capital Market

Great. That’s helpful. And you could be much follow-on. Looking at power margins in the quarter, obviously, they are extremely strong at 10.1%. And I guess talking -- a question for Mike, how much is this really due to the improvement in volume and better productivity in the quarter versus just a higher aftermarket currency and parking services? And should we view this level of margin a sustainable or how should we view this progression as we basically go into 2012?

Mike Taff

Yeah. Rob, Mike, good question. I think it’s probably combination of both what you heard on what I commented. I mean, overall, as I look forward, I think we feel very comfortable with the margin range we talked about in the past. The 7% to 10% obviously, that margins going to bounce around a lilted bit quarter-to-quarter. But again, we feel very comfortable in that 7% to 10% range.

And as I have stated in the past, as we start to see some momentum coming out of this environmental movement and we see that topline start to expand that’s when you will see that margin consistently be at the upper end of that range.

Rob Norfleet – BB&T Capital Market

Great. Thanks for your time. Congrats on the great quarter.

Mike Taff

Thank you.

Brandon Bethards

Thank you.

Operator

And our next question comes from the line of Joe Ritchie from Goldman Sachs. Please proceed.

Joe Ritchie – Goldman Sachs

Everyone nice quarter.

Brandon Bethards

Thanks Joe.

Joe Ritchie – Goldman Sachs

And so my first question, I really wanted to talk about the, your DOE annual authorization, I think last year you booked north of $800 million in December and clearly, I think were off took it start this year with the nuclear fuel contract that you booked this quarter?

I guess can you walk us through a little bit what the processes are going to be in booking or annual DOE authorization and what your expectation is from a magnitude standpoint this year?

Mary Pat Salomone

From the -- this is Mary Pat. From the perspective of timing we would expect that we will get our annual award yet this year. We don’t have any reason to believe those will be delayed and then from the standpoint of magnitude, the magnitude about equivalent it consistent with previous years, what we expect.

Brandon Bethards

Yeah. I mean, Joe, I mean, I think if you look at what our backlog end of the year last year at around just north of $3.1 billion. I think we should be in that same general range that we are projecting into this year, assuming the things happen in December as we expect.

Joe Ritchie – Goldman Sachs

Okay. Great. That’s helpful. And then I guess my follow-on question is really on the emission side, it seems like you’ve got an increased level of activity has you addressed some more market change at all?

And when would you expect to maybe see some of these large orders coming through a things like -- some of the orders that we seen have been a little bit smaller in size and I think they have been mostly Casper oriented, still perhaps you can touch on those points? Thank you.

Brandon Bethards

Yes. That’s a good question. The way that we translate using from this phase to the next phase of this market is one that often begins with an engineering release followed by a material release and construction et cetera.

So this is not untypical what we’ve seen in the past with regard to the size and order magnitude of those contracts. And the interesting thing this time is that Casper is obviously the socks market. We’re seeing more activity there because is farther along in the category of certainty from the EPA if you would.

We expect the UMAC, which is scheduled to release in final form in December to drive more of the mercury related removal installations and we’re seeing a lot of early engineering activity around process configuration around the utilities fleet-wide system evaluating options.

So that’s moving along but we would expect the size of the projects in -- with regard to booking to increase over the next few quarters as we moved from the early study phase into implementation phase. Was that helpful or…?

Joe Ritchie – Goldman Sachs

Yeah. I think the one last question I had was in regard to your addressable market, does that changed at all? I think you guys...

Brandon Bethards

No. We stated that in the call that we believe that the addressable market remains in the $12 million to $24 million range and I would also -- $1 billion range. And I would also add that some of the modifications to the implementation of both Casper and UMAC that you see publicized in the media.

We view it’s actually favorable to Babcock & Wilcox, particularly in the area of proposed extensions to time. It’s physically not possible to do all of the work that has to be done under the proposed schedules.

So well there is a lot activity and a lot of public dialogue as we go through and look at that and analyzes as it relates to the addressable market, if there is any buyers it would be to the upside with regard to the size the market not the downside. Yeah.

Mike Taff

And I mean, just to clarify that Joe, what Brandon is saying is that we believe that the beginning day will remains as is but the back end day could possibly get pushed out anywhere from one to three years, which we view that as positive for B&W.

Joe Ritchie – Goldman Sachs

That makes sense. I will get back in queue. Thanks guys.

Mike Taff

Thanks, Joe.

Operator

And our next question comes from the line of Tahira Afzal from KeyBanc. Please proceed.

Tahira Afzal – KeyBanc

Hi. Good morning team. Many congratulations on the quarter again.

Brandon Bethards

Thanks Tahira.

Tahira Afzal – KeyBanc

Number one the question -- obviously a very positive movement on the governments part by giving you the design components of Ohio-Class replacement program, I guess, could you provide any color on what this implies for the Virginia-Class submarine program, being intact and it seems fairly separate from the Ohio-Class to the extent you can comment?

And then my follow-up question is really on the nuclear maintenance services side, you talked fairly positively and about your in-roads of there, if you could provide any more color on that?

Brandon Bethards

Okay. Tahira, I would be glad to. With regard to your question about Ohio-Class relative to the Virginia-Class program, as we’ve said in the past both of these programs will move forward. The relative impact or the positioning of the work into the yards, into the supply chain like ourselves is yet to be determined. Our customers will continue to evaluate that going forward with regard to needs appropriations et cetera.

It is very difficult to give you more precision than that other than the likely I can speculate that the worst case scenario might be something where Virginia Class production rate is extended out or reduced and some of the Ohio-Class falls into that. It maybe -- may not be a proportional unit increase, but it could be anywhere in between that. But we just have to wait until the final appropriation and scheduling is finalized.

And as I mentioned earlier we want to be into the manufacturing phase -- of this until somewhere in the 2014. So we are still a couple of years out and we’ll work the customers to try and optimize the program for their benefit.

Mike Taff

And until I mean, up until we get to that 2014 timeframe, I think the -- as we know today we don’t expect any changes on the procurement on the Virginia Class. So we would expect full procurement of two submarines per year up until that point that Ohio-Class sort of kicks off.

And even if, as Brandon is speculating, even if the procurement rate on the Virginia-Class declines somewhat in that 14, 15 timeframe, we still view adding Ohio-Class, net-net will be positive to our topline growth.

Tahira Afzal – KeyBanc

Got it. Okay. Thank you. And the second question on the nuclear maintenance services side.

Brandon Bethards

Yes. There is actually two interesting developments there. I think we announced the booking of a major maintenance project in Canada where we have continued to demonstrate dominance at that marketplace relative to that service over the last few years. And we are continuing to make inroads into the services market in the United States.

Some of those contracts that we received are not of the size that we typically issue, press releases on nor often does the customer want their site and name mentioned in those awards. But I would tell you that we just completed the second major steam generator inspection service contract for a major U.S. utility.

And we had outstanding results. We completed the project approximately 4.5 days. I think it was ahead of schedule. We had higher than the previous supplier productivity rates and we had a lower dosages inquired during the outage. So, all of that continues to build for establishing our position in the U.S. market.

Tahira Afzal – KeyBanc

Thank you so much.

Operator

And your next question comes from the line of Jamie Cook from Credit Suisse. Please proceed.

Jamie Cook – Credit Suisse

Hi, good morning and congratulations. Two quick follow-up questions. One, unless I miss, can you provide, you talked about on the last quarter the $1.6 billion bidding activities on the emission side in the first half then another $1 billion that was further out, where those numbers stand?

And then obviously we had a book of good -- booking quarter in emissions and it sounds like that should continue. Mike just your thoughts on -- I know, we are going to be in the engineering phase, but at what point does the revenue -- acceleration in revenue, I guess really kick-in on the emission side, I mean is it -- especially, with some of the large awards coming on in the second quarter, is it third quarter?

And I’ll go back in queue after that.

Mike Taff

Thank you. I’ll take your second question first and then Brandon will take your first question. As it relates to those bookings, as we said, we do anticipate see increased booking as we saw in the third quarter some more in the fourth and then more robust for second, third. I think you will see some pretty modest revenue growth year-over-year in Q1 and Q2 and then that’s starting to ramp-up a little bit more significantly in Q3 and Q4, next year.

Jamie Cook – Credit Suisse

So by Q3, Q4, we should have pretty solid double-digit growth and I’m assuming at that point to, with some of the capacity being utilizing the margin should accelerate at that point in the back half as well?

Mike Taff

I think that’s fair. I mean I think you should see close to double-digit growth year-over-year as you get into Q3 and Q4.

Jamie Cook – Credit Suisse

In the margins as well, should accelerate at that point, Mike?

Mike Taff

I think margins always a timing of quarter-to-quarter, but again I mean as we start ramping up and we see power gen really starting to get to that magic number, which is in my mind always been close to that $2 billion and higher on annual basis that’s when we get the throughput in, our utilization goes up significantly and we are much more comfortable at the higher end of that range.

Jamie Cook – Credit Suisse

And sorry, is there any thing as we think about 2011 versus 2012? Any material project close-out coming out to you over the next, say, six to twelve months?

Brandon Bethards

Jamie, this is Brandon. Let me take that one. As you know over the last couple of years, we’ve been basically working down a lot of those major projects and when you do that you’re looking at those close-outs in the rearview mirror.

And as we discussed earlier, these major environmental projects and the major boiler projects as it relates to non-coal fired installation, typically run anywhere from 24 to 36 months schedule, sometimes as highest as 48 months, depending on whether it’s program installation or not.

So, you are going to go through a period where the number of close-outs are -- the backlog for close-outs has actually building up in the process. So we are pretty much through most of that right now. So we’ll have to monitor the performance over the next few quarters before we start to get back into the close-out regime.

Jamie Cook – Credit Suisse

It’s okay. That’s helpful.

Brandon Bethards

Okay.

Jamie Cook – Credit Suisse

And then just a part of bid, sorry.

Brandon Bethards

Yeah. With regard to bids, the bids outstanding are more or less the same this quarter as they were last quarter in the $1.6 billion range. The important thing is that they are moving through the pipeline if you will to actually some type of resolution or outcome and we still see the forward linking -- the forward linkage to the market to be similar to what we saw last quarter.

Mike Taff

Yeah. I mean I think the total bids obtain for the whole company were around $3.3 billion and bid in that was the significant piece related environmental and then as we look forward, things were just having conversations about -- I think last quarter we said that number on environmental side was around $2.5 billion and today, I mean, that’s in that -- 260, 270 in range. So again, I think it’s still very positive from a total addressable market ends point.

Jamie Cook – Credit Suisse

Great. I will get back in queue.

Mike Taff

Thanks Jamie.

Operator

And your next question comes from the line of Steven Fisher, UBS.

Steven Fisher – UBS

Hi. Good morning.

Brandon Bethards

Good morning.

Mike Taff

Good morning, Steve.

Steven Fisher – UBS

You know it sound like on the power side -- positive service businesses has finally picked up, I’m just wondering if this is a sustainable trend wondering how your visibility is on how that piece of business is going to look over the next few quarters?

Brandon Bethards

Good question, Steve. With regard to visibility that is always a difficult one because those are usually orders that are placed with relatively short delivery time, but let me say, I think what we are seeing here is what we talked about a little over a year ago. We’ve gone through this protracted period of reduced spend and with regard to our plant maintenance particularly in the area of coal power generation.

And that is basically like you would think of it is deferred maintenance on your car, you can operate in that mode for a while, but eventually you have to spend the money to maintain the availability in capacity factors on your plant. And I think that’s what we are seeing now is that ramp-up coming out of this extended period of slower economic recovery to where the point -- to the point that the utility simply have to spend a little bit more on capital and non-capital maintenance.

So that’s a long way to answer but the short answer to your question is we would expect to see that trend continue for the near term.

Steven Fisher – UBS

Okay. And on the government nuclear components, just curious why the revenues declined there and if this is just a temporary dynamic?

Mike Taff

Yeah. You mean that on our nuclear operations group?

Steven Fisher – UBS

Yes.

Mike Taff

Yeah., I mean, I think overall it’s just more timing. We had some procurement long lead material items that got pushed to the fourth quarter, not unusual. I mean again that revenue is going to bounce around a little bit. It is just a really solid business i.e. you know you can’t bode those guys. They are having record years and you know business is going to generate probably north of $200 million in EBITDA this year. So we are very, very pleased with the operation and results that same is delivering to the company.

Steven Fisher – UBS

Okay. So as you get into the fourth quarter that just start to grow again on a year-over-year basis, it sounds like...

Mike Taff

Yeah. You know, I think so and -- I think I mean year-over-year that’s strong single-digit growth of top-line there. And then it’s kind of what I’ve said all long, I mean we were growing at close to double-digits during the ‘08, ‘09 and ‘010 and so I mean I think topline growth for this year is going to end up in a pretty strong single-digit and with pretty comparable probably for future periods as well.

Steven Fisher – UBS

Okay. Thanks a lot.

Mike Taff

Yeah.

Operator

And our next question comes from the line of Randy Bhatia from Capital One Southcoast. Please proceed.

Randy Bhatia – Capital One Southcoast

Good morning, guys. Thanks for taking my question.

Brandon Bethards

Good morning.

Mike Taff

Good morning.

Randy Bhatia – Capital One Southcoast

One quick, if you could just tell me is there any change to the kind of mPower spend trajectory as we look into next year or do you expect to be kind of similar to what we are seeing this year?

Brandon Bethards

Well, Randy the mPower spend trajectory is consistent with what we’ve described about a year ago. This is been a year of ramp-up in spend. And then we’re going to see it more or less leveling off at the current quarter rate through 2012 and early 2013 and then start to decline over time.

Randy Bhatia – Capital One Southcoast

Okay. And just real quick, is there any update on the India project? Can you give just a…?

Brandon Bethards

The India joint venture? All right, rather the update is we didn’t include anything entered in this call because its basically proceeding for plan, as we’ve talked about in the last call we are under construction of the high ROI, high value-added manufacturing facility.

And we did -- when we’ve done some test bidding into the market, utilizing the joint venture if you would, we weren’t expecting particularly to win any of those projects. But it was a good way to sort of test drive the operations if you will and we were pleased with how that work.

Randy Bhatia – Capital One Southcoast

Okay. Any indications on when you guys might expect to start wining projects out of that JV?

Brandon Bethards

It will be -- we -- the next -- this is a more proactive bidding process, and I would expect to potentially see some results from that around mid year, next year, in the third, possibly the fourth quarter.

Randy Bhatia – Capital One Southcoast

Okay. Great. Thanks very much.

Mike Taff

Thank you.

Operator

And your next question comes from the line of Chase Jacobson, William Blair. Please proceed.

Chase Jacobson – William Blair

Hi, good morning.

Brandon Bethards

Good morning Chase.

Mike Taff

Good morning.

Chase Jacobson – William Blair

So your R&D expense in the power generation segment jump quite a bit in the quarter, is that because of the accounting with Bechtel partnership or is that B&W’s R&D specifically and is that related to anything specific, whether its mPower progressing a little bit quicker or if you’re doing work for another potential customer or if its just going to be lumpy and still remain around that $80 million annually?

Mike Taff

Hi, Chase. I think, you meant probably it grew when attempting particular segment, it’s grew in nuclear energy not power gen, correct. But yeah, the biggest growth and as I mentioned in the call was this -- the way we are accounting for Bechtel and kind services. So I mean if you look just total for the whole cooperation for the quarter, our R&D spend was $34.6 million, $10.5 million of that was in -- non-cash, non-tax deductible.

So basically Bechtel is paying all the bill and services for that and they are contributing that to the mPower program. So it’s clearly not a cash expense on our books nor do we feel like there is ultimately a liability that we owe back before that, this is just part of the agreement we have with them.

But from an accounting standpoint, we required that consolidate those expenses under our books. So at the way -- the way I think of it, Chase is that our true R&D expense for the company was $24 million in the quarter and about $18 of that came from related mPower and the other $5.6 came from our traditional power group.

Chase Jacobson – William Blair

Okay. I didn’t mean Nuclear Energy. I just wasn’t sure as to where that non-cash, non-deductible which liner it went to, so thank you there. The other thing just a follow-up on the Nuclear Services within Nuclear Energy in the U.S., you’re gaining some traction there with customers.

You did talk about the contracts coming in smaller than what you usually released. But how should we think about that going forward as to how it will may be level out the results and make their results more consistent in that business excluding of course mPower?

Mike Taff

Well, Chase, the Nuclear Service contracts are usually a -- what I’d call book and build type business. They are seasonal in nature. They occurred during the plant shutdown which means they are on the shoulder seasons of the power industry.

And so, the nature of providing implant inspection services is going to have pick and value approach to us. So, from that standpoint it’s actually unleveling process, but it is positive because it generates the increased revenue and up income. As it relates to the long-term, as we’ve discussed before that that’s a market segment that we had taken along sabbatical from and are just moving back into it.

So a small percentage growth in market share is a short and immediate term growth opportunity for us and we are going to proceed diligently but also cautiously with regard to our build up in capacity and make sure that we satisfy our customer expectations, but we are just now on the leading edge of that particular growth initiative.

Chase Jacobson – William Blair

Okay. Thank you.

Operator

Your next question comes from the line of Andy Kaplowitz, Barclays Capital. Please proceed.

Andy Kaplowitz – Barclays Capital

Good morning, guys. Nice quarter.

Brandon Bethards

Thank you, Andy.

Mike Taff

Good morning.

Andy Kaplowitz – Barclays Capital

So, Mary Pat talked about technical services, nice pick-up in equity income, obviously this is enforcement it’s ramping up, is this the new run rate to focus on at a very high number versus your past that almost $15 million in technical services, equity income. So how do we view it going forward, especially, concern enforcement it is probably still ramping up?

Brandon Bethards

Well, Andy we are basically through the transition phase. There are small enforcement, but this was an exceptional quarter as Mary Pat detailed in her description and I would not look at that as the new normal run rate. There were some unique items in there that are timing related and our deferred expense related.

So the new norm on that would be something lower than that and I think you can look at our historically level plus most of factors being something more rational. The other thing you have consider too Andy is as we move in to 2012, a lot of stimulus money that was directed through the DOE and through our sites that was the basis for increased fee earning potential is starting to come out of the program because of the budgeting battles.

So net-net you can take a look at our historical performance and put a small increment to that and you will be more in the range. But it would be a mistake to take this past quarter and use that as the new norm for that business going forward.

Andy Kaplowitz – Barclays Capital

Okay. Thanks fine Brandon and if I can follow-up in Jeff’s question on nuclear energy actually, if you back out R&D and the charge from the Columbia generating station you still have negative earnings in that segment. And I know it’s a new business for you but when do we see more sustainable positive earnings in that segment coming? Is it going to be a couple of quarter? Is it immediately? And how should we view that?

Brandon Bethards

I would view that as near term to immediate with regard to the underlying profitability of that business ex-the mPower R&D expense. Like I mentioned earlier there is a little bit seasonality on that with regard to when the outages occur and the service work is performed.

And we also continue to be some lumpiness with regard to the POC on the large components like replacement of steam generators. But going forward we would expect net of the mPower expenses or ex adjusted for the mPower expenses that to be a profitable business and would have margin somewhat in the same range as the Power Gen group.

Mike Taff

Yeah. I mean, I think margin wise it’s going to be certainly at the lower end of that range at even maybe catch a little bit in general at margins probably more of a 5% to 8% margin versus 7% to 10% margin because you do have a pretty heavy manufacturing piece and that as well some of these large places steam generators, but I really otherwise [do anything].

Brandon Bethards

And the other reason to support what Mike saying on the margin at least over the near-term in the sense that as you -- as we had to ramp-up with capacity for the U.S. market, you have a certain amount of front end loaded SG&A that goes into the program that doesn’t get normalized for a couple of years.

Andy Kaplowitz – Barclays Capital

Okay. Thanks guys.

Mike Taff

Thank you.

Operator

And your next question comes from the line of Scott Levine from JP Morgan. Please proceed.

Scott Levine – JP Morgan

Hi, good morning, guys.

Brandon Bethards

Good morning, Scott.

Scott Levine – JP Morgan

Probably, you may give an update on the competitive landscape for mPower, obviously you seen some evolvement, some other folks getting more active in this more modular space, so maybe an update regarding competition and outlook for the DOE program?

Brandon Bethards

Good questions, Scott. That could take -- to give that question justice we’d take quite a few minutes. But let me try to catch it like this. All things considered and I’m going to back up early this year. I think Fukushima has had a somewhat dampening effect on the appetite for new base power generation from new base power generation from nuclear. But it is only that is dampening effect related to that event in time.

We continue to see very strong interest in this technology. And I think the activity by others that is floor and Westinghouse and Shaw with [Wholetech] are all examples of the realization at the interior market is coming to of the potential of SMRs. And I’m pleased to say that I think if you look at a lot of objective, third-party analysis so where people obviously are remain continually referenced as a leader in that field. So net of all of those impacts, we feel good about the program and there are certainly a significant amount of interest growing for SMRs not only in the U.S. but for the non-U.S. markets.

Scott Levine – JP Morgan

Thanks Brandon. One follow-up housekeeping on pension, is there any update with regard to the outlook for contribution and expense for this year maybe beyond?

Mike Taff

Yeah. I mean, I think I mentioned that we did have a pretty significant contribution quarter this year. So I mean, I think fourth quarter contribution won’t be near significant as what we had in the third quarter, annualized the pension contribution has grown with what we put in this year.

So I think the total contribution this year is going to be around $165 million or so. Most of that occurred, you have seen a slight decline in pension expense this quarter annualized quarter expense was around $25 million, I would expect something in that general range and then in Q4.

And then once we see how the markets kind of finalized both on the interest side as well as the asset return we’ll be able to give you a better picture for what 2012 looks like, but first flesh, I would say its going to be in general range in that $25 to $30 million expense range for 2012, as well for quarter.

Scott Levine – JP Morgan

Got it. Thanks Mike. Thanks guys.

Mike Taff

Yeah.

Operator

And your next question comes from the line of John Roger of D. A. Davidson & Company. Please proceed.

John Roger – D. A. Davidson & Company

Hi. Good morning. And congratulations as well.

Brandon Bethards

Thanks John.

John Roger – D. A. Davidson & Company

Just a couple of quick follow-ups. First of all, Mike when you talked about margins of 7% to 10%, are you saying about the Power Generation or overall and then relative to the acceleration you see next year?

Mike Taff

Power Generation.

John Roger – D. A. Davidson & Company

Okay. Because you’re 10%, you’re seeing it will get up above that by end of next year?

Mike Taff

No, I mean I think what we’ve said is that our advertise margin range in Power Gen has been 7% for a while. And again I think we feel very comfortable with that range. It’s going to bounce around. John, you followed us for a long time, quarter-to-quarter it’s going to bounce around.

But again, I think when you look at it over several months or 12 month period, I think we feel comfortable with that 7% to 10% industry leading margin. And I think we are able to consistently be at the higher end of that margin range as a topline grows and that’s really worked.

You go back and look at history that’s where we were back and you call back in the late ‘06 and ‘07, ‘08 timeframe, when this business unit was had total revenues north of $2 billion.

John Roger – D. A. Davidson & Company

Okay. Okay. Thanks. And then, Brandon, when you’re talking about market share in the environmental services or the environmental side of the business, can you break that down a little bit in terms of what you’re targeting for equipment versus actual construction services, if there’s a significant difference?

Brandon Bethards

There are differences John. And let me say that we are targeting in this cycle more or less the same market share that we targeted in the and demonstrated in the life cycle. And now that will vary by product component that is SCRs versus wet scrubbers versus dry scrubbers versus bay houses, but on a normal basis across all those product lines in the life cycle it was in that 30% to 40% range.

Historically, we will erect about 60% of the equipment we supplied. Now that will vary over the course of the business cycle because in the front end it tends to get sliced and diced as you would expect in the front end until it gets more pressure on the supply chain in terms of capacity. And we would expect to see something similar to that this time around.

Mike Taff

So, I mean, if you kind of just break it down from market share standpoint, Brandon is exactly right, so 35% to 40% is our market share only equipment supplied and then on the construction side as we said -- we generally went about 50% to 60% of those jobs on construction side.

On the jobs where we were not supplying the equipment so the competitors technology, but we bid on the construction side our success rate is as much lower probably brand -- and may be that 10% to 20% range or so.

Brandon Bethards

It will be more in the 10 to 20 because it is usually not a target initiative for us.

Mike Taff

Right. That’s correct. So I hope that helps, that’s little more clear to John.

John Roger – D. A. Davidson & Company

Yeah. I know. I appreciate the color. Thanks.

Operator

There are no further questions. I would now like to turn the call back over to your host Mr. Michael Dickerson for any closing remarks.

Michael Dickerson

Thank you, Robin. And thank you everyone 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. Also available on our website is a company overview that has some additional information that we’ll share with investors and analysts during various meetings throughout the quarter. And I’ll be available throughout day to take any further calls. Thank you everybody.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Babcock & Wilcox's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts