Babcock & Wilcox Announces First Quarter 2011 Results

The Babcock & Wilcox Company (NYSE: BWC) ("B&W” or the "Company”) today reported revenues for the first quarter of 2011 were $691.3 million, an increase of $28.9 million or 4.4% from the first quarter of 2010. Net income for the first quarter of 2011 was $13.5 million compared to $16.8 million in the first quarter of 2010. Included in net income for the first quarter of 2011 is the impact of unfavorable adjustments for loss contracts of approximately $20.0 million on an after-tax basis. The resulting earnings per share for the first quarter ended March 31, 2011 were $0.11 compared to $0.14 in the first quarter of 2010.

Recent Highlights

• Awarded $668 million waste-to-energy power plant construction contract and $235 million 10-year operations & maintenance contract
• Awarded $30 million renewable energy power generation contract in Sweden
• Received $5 million grant for small modular reactor testing facility
• Achieved record bookings of power generation aftermarket parts
• Industrial MACT rules finalized; draft utility boiler MACT rules released
• Broke ground on an ultra supercritical boiler manufacturing facility in India
• Announced B&W is in discussions to provide nuclear technical assistance and services to the Fukushima Daiichi nuclear power plant in Japan
• Named Peyton S. Baker President of Babcock & Wilcox Nuclear Operations Group, Inc.
• Named Ali Azad President and Chief Executive Officer of Generation mPower LLC

Consolidated Results of Operations

Consolidated revenues for the first quarter of 2011 were $691.3 million, an increase of $28.9 million or 4.4% from the first quarter of 2010. This increase was across all business segments. Operating income for the first quarter of 2011 was $21.9 million compared to $38.7 million in the first quarter of 2010. Included in the first quarter 2011 operating income was the impact of unfavorable adjustments for loss contracts of $11.1 million and $21.6 million in the Nuclear Operations and Nuclear Energy segments, respectively. As of March 31, 2011, we operate in four reportable business segments: Power Generation, Nuclear Operations, Nuclear Energy and Technical Services. We discuss the change in reportable business segments further below.

Power Generation Segment

Revenues of $356.2 million for the first quarter of 2011 were approximately flat compared to the $355.9 million reported in the first quarter of 2010. This result was principally related to increased volumes of construction service projects and environmental aftermarket services offset by a decline in demand for new-build environmental systems. Operating income was $26.6 million in the first quarter of 2011, an increase of $5.9 million, or 28.5% compared to $20.7 million in the first quarter of 2010. This represents an operating margin of 7.5%, an increase of 170 basis points from the prior year first quarter. The increase in operating income is principally related to the strong aftermarket service and replacement parts businesses and higher year-over-year royalty fees from international licensees.

"We are positioning the business for the expected continued growth in demand for coal-fired power generation in Asia and resumption of growth in the U.S., which is expected to improve as a result of several factors,” said Brandon C. Bethards, President and Chief Executive Officer of B&W. "First, key leading indicators such as power consumption would suggest that utilities will need to increase their level of spending with respect to the maintenance of their assets in an effort to maintain or improve availability and capacity factors. Second, the Company continues to experience improvements in its small parts and service businesses, traditionally good leading indicators for future utility investment. Third, the U.S. Environmental Protection Agency has issued final rules with respect to industrial boiler maximum achievable control technology ("MACT”) and has issued draft rules for utility boiler MACT. These events are important factors that we believe are leading our utility customers to buy testing programs and engineering studies to assess and plan for capital requirements to achieve compliance with the rules.”

Nuclear Operations Segment

Revenues of $250.5 million increased $16.2 million or 6.9% in the first quarter of 2011 compared to the first quarter of 2010. This increase is principally the result of an increase in activity for naval nuclear reactor components and nuclear fuel. Operating income of $30.5 million increased $6.0 million or 24.5% in the first quarter of 2011 compared to the first quarter of 2010. This increase is principally related to productivity and project execution improvement on the production of nuclear reactor components partially offset by costs at Nuclear Fuel Services, Inc. ("NFS”). The increased costs at NFS were due to processing challenges and unfavorable revised throughput estimates on several downblending contracts in place at the time of the acquisition of NFS. During the first quarter, NFS began a first-of-a-kind downblending operation on certain uranium oxide materials, which represents approximately the last 2% of the total contract volume of material on a commercial contract that NFS had entered into in February 2002. Initial processing of this material in the first quarter of 2011 resulted in achievement of approximately half of the expected throughput rate, which had been established based on laboratory testing. Due to the high fixed-cost nature of NFS, this resulted in one-time costs of $11.1 million on several downblending contracts due to increased manhour estimates and downstream production scheduling inefficiencies for the period. "At recently improved run rates, we expect this material to be fully processed in approximately 60 days from today. We have taken steps to re-evaluate the balance of the material and adequately reserved for the remainder of the loss contract, containing the issue to the first quarter of 2011. Additionally, we expect NFS will produce positive operating results for the full year. Inclusive of the unacceptable results at NFS, the consolidated Nuclear Operations segment was able to deliver a 24% year-over-year increase in operating earnings on the continuing strength of the nuclear component business,” Bethards said.

Nuclear Energy Segment

Revenues of $65.3 million increased $9.3 million or 16.6% in the first quarter of 2011 compared to the first quarter of 2010. The increase in revenues is due principally to the success achieved supplying commercial nuclear components and volume associated with nuclear project contracts. Operating loss of $37.5 million increased $26.1 million in the first quarter of 2011 compared to the first quarter of 2010. This loss includes $15.9 million of research and development and selling, general and administrative expenses related to the B&W mPower^TM modular nuclear reactor program and $21.6 million for a loss contract for a nuclear projects contract. This loss contract was bid and awarded in 2009. As substantial field-work began in late March 2011, the Company became aware that the estimated cost of the project did not adequately reflect the actual scope and complexities of the work proposed under the contract. The Company has made an in-depth review of this project and has fully reserved for the expected loss on this contract in the first quarter of 2011. "I am confident that we have contained this issue to the first quarter of 2011 and that the current bid processes and contract procedures will help prevent this type of cost estimating misalignment from occurring in the future. There is an opportunity to improve the results of this contract in future quarters from a combination of claims and change orders resulting from customer-driven changes in scope and scheduling delays associated with out-of-scope site conditions. Further-more, executive management will maintain their intervention in this contract until successfully completed. Finally, we have reviewed our existing backlog in-depth and we are confident that we do not have any other fixed price contracts in our nuclear projects business unit that could produce such an unfavorable result,” Bethards said.

As expected, total expenses related to the B&W mPower reactor program have increased in the last several months principally as a result of the accelerated commercial activities of the program. Recent events at the Fukushima Daiichi plant in Japan have led to considerable discussion and speculation about the impact to commercial nuclear markets. All indications received by the Company from prospective customers and regulatory and governmental agencies are that programs related to modular nuclear reactor technology are continuing as planned. "In fact, we are experiencing an increase in potential customer interest in our technology partially due to the inherent safety features of the B&W mPower unit compared to the large-scale nuclear units operating in the market today. This interest is both from U.S. utilities as well as utilities and governments outside of the U.S.,” Bethards said.

Technical Services Segment

Revenues of $28.4 million increased $8.8 million or 44.9% in the first quarter of 2011 compared to the first quarter of 2010. Operating income, including the Company’s portion of income from unconsolidated entities recorded as equity income, of $12.1 million increased $1.4 million or 13.3% in the first quarter of 2011 compared to the first quarter of 2010. This increase in operating income is due principally to new contracts received in the second half of 2010 that were beginning to ramp up in late 2010 and early 2011. The largest contract awarded to B&W recently, the $2.1 billion Department of Energy ("DOE”) decontamination and decommissioning contract for the Portsmouth Gaseous Diffusion Plant in Ohio, began operation early in the second quarter of 2011 and will ramp up to full-scale operations over the next several quarters.

Liquidity

The Company’s cash and investments position, net of debt, was $375.3 million at the end of the first quarter of 2011 compared to $472.9 million at the end of the fourth quarter of 2010, a decrease of $97.6 million. During the quarter, the Company made cash contributions for 2010 incentive compensation programs and made approximately $44 million in contributions to its pension plans. In addition to net cash, the Company maintains a $700 million revolving credit agreement with approximately $473 million of availability as of the end of the first quarter. The Company continues to maintain adequate liquidity to fund operations, which could include increased working capital requirements, internal growth and R&D programs, as well as additional product and geographic expansion opportunities.

Change in Reported Business Segments

Prior to the first quarter of 2011, the Company operated in two business segments. During the first quarter of 2011, consistent with the methodology to assess operating performance and allocate resources, as well as to provide investors with greater transparency, the Company revised its segment structure. The new segment structure divides the former Power Generation Systems segment into the Power Generation and Nuclear Energy segments, and divides the former Government Operations segment into the Nuclear Operations and Technical Services segments. This change in our business segment structure had no effect on our previously reported consolidated and combined results of operations, financial position or cash flows. In connection with this change we have reclassified historical amounts to conform to our current segment presentation. Attached to this press release is reclassified unaudited quarterly segment information for 2010 and 2009, which may be adjusted, based on audit results.

Description of Reported Business Segments

Power Generation segment - supplies boilers fired with fossil fuels, such as coal, oil and natural gas, or renewable fuels such as biomass, municipal solid waste and concentrated solar energy. In addition to carbon capture technologies, we supply environmental equipment and components and related services to customers in different regions around the world. We design, engineer, manufacture, supply, construct and service large utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications and other industrial uses.

Nuclear Energy segment - designs and manufactures commercial nuclear power equipment, including nuclear heat exchangers and steam generators, and provides outage related inspection, maintenance and construction services for nuclear generating stations around the world. This segment includes the operations of the B&W mPower modular nuclear reactor program.

Nuclear Operations segment - manufactures naval nuclear reactors for the U.S. DOE /National Nuclear Security Administration ("NNSA”) Naval Nuclear Propulsion Program and supplies them to the U.S. Navy for use in submarines and aircraft carriers.

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 DOE, including the NNSA, the Office of Nuclear Energy, the Office of Science and the Office of Environmental Management. The Company’s participation in the American Centrifuge Project is also included in this segment.

Conference Call to Discuss First Quarter 2011 Results

Date: Tuesday, May 10, 2011, at 8:30 a.m. ET
Live Webcast: Investor Relations section of website at www.babcock.com

Forward-Looking Statements

B&W cautions that this release contains forward-looking statements, including, without limitation, statements relating to our confidence that we have contained the losses on the nuclear projects contracts, expectation for growth in demand for power generation in Asia and resumption of growth in the U.S., the expected impact and implication of power consumption, positive trends in certain areas of our business and issuance of MACT rules on demand, and the anticipated improvement of certain run rates at NFS. These forward-looking statements are based on current management expectations and involve a number of risks and uncertainties, including, among other things, adverse changes in the industries in which we operate, including adverse affects of the earthquake and tsunami in Japan in March 2011 and our ability to execute on contracts in backlog. If one or more of these or other risks materialize, actual results may vary materially from those expected. For a more complete discussion of these and other risk factors, please see B&W’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2010. B&W cautions not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and undertakes no obligation to update or revise any forward-looking statement, except to the extent required by applicable law.

About B&W

The Babcock & Wilcox Company is a leader in clean energy technology and services, primarily for the nuclear, fossil and renewable power markets as well as a premier advanced technology and mission critical defense contractor. B&W has locations worldwide and employs approximately 12,000 people, in addition to approximately 10,000 joint venture employees. A company overview presentation, which will be presented at investor conferences and meetings throughout this quarter, is available on the Investor Relations section of our website. For additional information please visit our website at www.babcock.com.

TABLES TO FOLLOW