Basis of Presentation and Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Reporting Segments

We operate in five reportable segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Our reportable segments are further described as follows:

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Our Power Generation segment provides an advanced, clean and diverse portfolio of steam generating equipment, proven emissions control systems for environmental regulations, renewable energy solutions (biomass, combined heat and power, waste-to-energy and concentrating solar power), boiler cleaning systems, material transport equipment, fuel handling systems, cogeneration and combined cycle installations, and carbon-capture and sequestration technologies. For this full range of product offerings, we offer complete aftermarket, operation and maintenance and construction project services. We provide products and services to electric utilities, municipalities, EPC contractors, architect engineers, independent power producers, international trading firms, electric power cooperatives and state electricity boards. Our markets include electric power generation, industrial, pulp and paper, chemical, oil refinery, cement, institutional, municipal and government customers worldwide. We have an extensive North American and global footprint including engineering, design, service, manufacturing, sales, business development, regional service centers, manufacturer’s representatives and joint venture facilities located in more than 30 countries around the globe. We have supplied product and services for more than 300,000 MW of installed electric generating capacity in more than 80 countries.

Our steam generating equipment operates on a range of traditional fossil fuels including coal, natural gas and oil along with renewable, unconventional and other typical waste fuel streams. We have commercialized many advanced emissions technologies to control nitrogen oxide, sulfur dioxide, sulfur trioxide, coarse and fine particulate matter, mercury, acid gases and other hazardous air emissions.

On June 20, 2014, we completed the acquisition of MEGTEC Holdings, Inc. (“MEGTEC”). MEGTEC designs, engineers, manufactures and services air pollution control systems and coating/drying equipment for a variety of industrial applications and is expected to complement our environmental products and solutions offerings.

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Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy (“DOE”)/National Nuclear Security Administration’s (“NNSA”) Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Through this segment, we own and operate manufacturing facilities located in Lynchburg, Virginia; Mount Vernon, Indiana; Euclid, Ohio; Barberton, Ohio; and Erwin, Tennessee. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components. These two locations are N-Stamp certified by the American Society of Mechanical Engineers (“ASME”), making them two of only a few North American suppliers of large, heavy-walled nuclear components and vessels. The Euclid facility, which is also ASME N-Stamp certified, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. (“NFS”), one of our wholly owned subsidiaries. Located in Erwin, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.

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Our Technical Services segment provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities. These services are provided to the Department of Defense and the DOE, including the NNSA, the Office of Nuclear Energy, the Office of Science and the Office of Environmental Management. Through this segment we deliver products and management solutions to nuclear operations and high-consequence manufacturing facilities. A significant portion of this segment’s operations are conducted through joint ventures.

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Our Nuclear Energy segment supplies commercial nuclear steam generators and components to nuclear utility customers. B&W has supplied the nuclear industry with more than 1,300 large, heavy components worldwide. This segment is the only heavy nuclear component, N-Stamp certified manufacturer in North America. Our Nuclear Energy segment fabricates pressure vessels, reactors, steam generators, heat exchangers and other auxiliary equipment. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development and metallurgy and materials engineering. In addition, this segment offers services for nuclear steam generators and balance of plant equipment, as well as nondestructive examination and tooling/repair solutions for other plant systems and components.

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Our mPower segment is designing the B&W mPower^™ reactor, a small modular reactor (“SMR”) design generally based on proven light-water nuclear technology and able to operate for four years without refueling. Through our majority-owned joint venture, Generation mPower LLC (“GmP”), we are developing the associated mPower Plant power generating facility, which will use two B&W mPower^™ reactors to generate 360 MW within an advanced passively safe and secure plant architecture. As part of this initiative, we were selected to receive funding pursuant to a Cooperative Agreement with the DOE under its Small Modular Reactor Licensing Technical Support Program (the “Funding Program”) for SMR deployment by 2022. This Funding Program provides financial assistance for our mPower Plant design, engineering and licensing activities supporting the planned first mPower Plant commercial operation date by 2022. On April 14, 2014, we announced our plans to restructure the mPower program to focus on technology development. Beginning in the third quarter of 2014, we expect to slow the pace of development and invest no more than $15 million on an annual basis, net of amounts reimbursed from the Funding Program. We intend to work with the DOE to amend the Funding Program to include, among other things, mutually agreeable program milestones for continued funding. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.

See Note 10 for further information regarding our segments.

Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and the related footnotes included in our 2013 10-K.

Contracts and Revenue Recognition

Contracts and Revenue Recognition

We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress completion as a percentage of the total project. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical, except to assure that no loss will be incurred, as deferred profit recognition contracts.

Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. Under the completed-contract method, income is recognized only when a contract is completed or substantially complete.

For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed.

Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable.

In the three and six months ended June 30, 2014, we recorded contract losses totaling $4.0 million and $11.6 million, respectively, for additional estimated costs to complete our Power Generation segment’s Berlin Station project, which includes estimated potential letter of credit draws for liquidated damages. These losses are in addition to contract losses recorded for this project during 2013 and 2012. We had previously asserted that substantial completion had been achieved on this project in early 2014 and that any further delays to complete this project, beyond the delays already caused by the customer during construction or otherwise excusable under the contract, are the result of the customer’s failure to supply fuel complying with the contract specifications. The customer has certified that we achieved substantial completion on the project effective July 19, 2014, following which the customer will have no further claims for Delay LDs. See Note 6 for legal proceedings associated with this matter.

Comprehensive Income

Comprehensive Income

The components of accumulated other comprehensive income included in stockholders’ equity are as follows:


	June 30,			December 31,
	2014			2013
	(In thousands)
Currency translation adjustments	$	31,277		$	38,415
Net unrealized gain on investments		207			130
Net unrealized gain on derivative financial instruments		438			627
Unrecognized prior service cost on benefit obligations		(10,030	)		(10,824	)

Accumulated other comprehensive income	$	21,892		$	28,348

The amounts reclassified out of accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Accumulated Other Comprehensive Income Component Recognized	(In thousands)												Line Item Presented
Realized (losses) gains on derivative financial instruments	$	(240	)	$	(621	)	$	(77	)	$	(1,152	)	Revenues
		1,153			(1,117	)		127			(2,006	)	Cost of operations
		—			101			10			116		Other-net

	$	913			(1,637	)	$	60			(3,042	)	Total before tax
		(234	)		395			(13	)		753		Provision for Income Taxes

	$	679		$	(1,242	)	$	47		$	(2,289	)	Net Income

Amortization of prior service cost on benefit obligations	$	(509	)	$	(660	)	$	(1,018	)	$	(1,411	)	Cost of operations
		(86	)		(50	)		(171	)		(100	)	Selling, general and administrative expenses

		(595	)		(710	)		(1,189	)		(1,511	)	Total before tax
		198			245			395			518		Provision for Income Taxes

	$	(397	)	$	(465	)	$	(794	)	$	(993	)	Net Income

Realized gain on investments	$	7		$	10		$	41		$	724		Other-net
		(3	)		(3	)		(15	)		(3	)	Provision for Income Taxes

	$	4		$	7		$	26		$	721		Net Income

Total reclassification for the period	$	286		$	(1,700	)	$	(721	)	$	(2,561	)

Inventories

Inventories

The components of inventories are as follows:


	June 30,		December 31,
	2014		2013
	(In thousands)
Raw materials and supplies	$	82,485	$	85,455
Work in progress		9,986		10,872
Finished goods		20,500		16,731

Total inventories	$	112,971	$	113,058

Restricted Cash and Cash Equivalents

Restricted Cash and Cash Equivalents

At June 30, 2014, we had restricted cash and cash equivalents totaling $42.3 million, $3.3 million of which was held in restricted foreign cash accounts, $2.6 million of which was held for future decommissioning of facilities (which is included in other assets on our condensed consolidated balance sheets) and $36.4 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).

Goodwill

Goodwill

Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually. We may elect to perform a qualitative test when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we utilize a two-step quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

The following summarizes the changes in the carrying amount of goodwill:


	Power Generation			Nuclear Operations		Technical Services		Nuclear Energy		Total
	(In thousands)

Balance at December 31, 2013	$	104,630		$	118,103	$	45,000	$	13,975	$	281,708
Acquisition of MEGTEC (Note 2)		115,314			—		—		—		115,314
Foreign currency translation adjustments and other		(193	)		—		—		—		(193	)

Balance at June 30, 2014	$	219,751		$	118,103	$	45,000	$	13,975	$	396,829

Intangible Assets

Intangible Assets

Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and tested for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to annual impairment testing. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by quantitatively determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible assets to its carrying amount. If the carrying amount of the intangible assets exceeds its fair value, we recognize impairment for the amount of the difference.

Warranty Expense

Warranty Expense

We accrue estimated expense included in cost of operations on our condensed consolidated statements of income to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

The following summarizes the changes in the carrying amount of our accrued warranty expense:


	Six Months Ended June 30,
	2014			2013
	(In thousands)
Balance at beginning of period	$	56,436		$	83,682
Additions		5,463			11,423
Acquisition of MEGTEC		4,693			—
Expirations and other changes		(3,204	)		(8,038	)
Payments		(4,568	)		(11,659	)
Translation and other		5			(921	)

Balance at end of period	$	58,825		$	74,487

Pension Plans and Postretirement Benefits

Pension Plans and Postretirement Benefits

We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S. and international subsidiaries. We utilize actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations utilize significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets and health care cost trends. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. The expected rate of return on plan assets assumption is based on capital market assumptions of the long-term expected returns for the investment mix of assets currently in the portfolio. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the classes within the total asset portfolio. Expected health care cost trends represent expected annual rates of change in the cost of health care benefits and are estimated based on analysis of health care cost inflation.

The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year, we immediately recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost. Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets.

We recognize the funded status of each plan as either an asset or a liability in the consolidated balance sheets. The funded status is the difference between the fair value of plan assets and the present value its benefit obligation, determined on a plan-by-plan basis. Our pension plan assets can include assets that are difficult to value. See Note 7 of our 2013 10-K for a detailed description of our plan assets.

Research and Development

Research and Development

Our research and development activities are related to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge research and development costs unrelated to specific contracts as they are incurred. Substantially all of these costs are in our Power Generation and mPower segments, the majority of which are related to the development of our B&W mPower^™ reactor and the associated mPower Plant.

During the three and six months ended June 30, 2014, we recognized $1.6 million and $5.8 million, respectively, of non-cash in-kind research and development costs as compared to $4.4 million and $7.4 million during the three and six months ended June 30, 2013, respectively, related to services contributed by our minority partner to GmP.

On April 12, 2013, Babcock & Wilcox mPower, Inc., a wholly owned subsidiary of B&W, entered into a Cooperative Agreement establishing the terms and conditions of a funding award totaling $150 million under the DOE’s Funding Program. This cost-sharing award requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50% of qualified expenditures incurred from April 1, 2013 to March 31, 2018. The DOE has authorized $105.5 million of funding to B&W for this award program. Congress has allocated and designated an additional $79 million from the 2014 budget to the Cooperative Agreement; however, the DOE has not yet obligated those funds to us. In the six months ended June 30, 2014 and 2013, we recognized $19.8 million and $37.8 million, respectively, associated with the funding award.

On April 14, 2014, we announced our plans to restructure the mPower program to focus on technology development. Beginning in the third quarter of 2014, we expect to slow the pace of development and invest no more than $15 million on an annual basis, net of amounts reimbursed from the Funding Program. We intend to work with the DOE to amend the Funding Program, to include, among other things, mutually agreeable program milestones for continued funding. If a mutually agreeable plan is not identified, future amounts may not be made available to us under the Funding Program.

Provision for Income Taxes

Provision for Income Taxes

We are subject to U.S. federal income tax and income tax of multiple state and international jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period. We classify interest and penalties related to taxes (net of any applicable tax benefit) as a component of provision for income taxes on our condensed consolidated statements of income.

Our effective tax rate for the three months ended June 30, 2014 was approximately 32.8% as compared to 29.8% for the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014 was lower than our statutory rate primarily due to the impact of an increase in benefits for amended federal manufacturing deductions and certain amended state return filings, offset by an increase to a valuation allowance against certain state deferred tax assets. The effective tax rate for the three months ended June 30, 2013 was lower than the effective tax rate for the period ended June 30, 2014 primarily due to the impact of settling claims within certain state and foreign jurisdictions in the prior year period.

Our effective tax rate for the six months ended June 30, 2014 was approximately 27.7% as compared to 28.6% for the six months ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 was lower than our statutory rate primarily due to the receipt of a favorable ruling from the Internal Revenue Service that allows us to amend prior year U.S. income tax returns to exclude distributions of certain of our foreign joint ventures from domestic taxable income. Our effective tax rate for the six months ended June 30, 2013 reflected the impact of certain tax benefits related to the retroactive provisions of the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013. These 2013 tax benefits relate primarily to research and development tax credits, for which we have not recognized a benefit in 2014 due to the current expiration of the tax credit.

As of June 30, 2014, we have gross unrecognized tax benefits of $5.9 million, which, if recognized, would lower our effective tax rate from continuing operations.

Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update to the Topics Presentation of Financial Statements and Property, Plant and Equipment. This update changes the criteria for reporting discontinued operations such that a disposal of a component of an entity will be required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We early adopted this pronouncement in the second quarter of 2014. The disposal of our Nuclear Projects business in the second quarter of 2014 did not qualify as a discontinued operation under the new guidance due to its relative insignificance to B&W’s operations and financial results. See Note 2 for additional information related to this disposal.

New Accounting Standards

New Accounting Standards

In May 2014, the FASB issued Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in the Topic Revenue Recognition and most industry specific guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This update is effective in 2017, and early adoption is not permitted. The update may be adopted either retrospectively to each prior period or as a cumulative-effect adjustment on the date of adoption. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.